The New York Times becomes a digital media powerhouse

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The internet has changed the business world a lot. This is obvious. But it affected some industries much more than others. Many well-known bookstores, video rental stores and newspapers went bankrupt. But a few have adapted and are thriving today.

A good example is New York Times (NYSE: NYT). Its shares fell 85% in the decade after 2000. Today it is a profitable company with solid growth. But its prospects are brighter than many realize. A comment from the CEO highlights how far the company plans to go further in its transformation.

Image source: Getty Images.

The registration paper

Drama is good for the news industry. And the past few years have provided many stories that people have wanted to follow. The annual subscription growth rate doubled in 2016. Since then, revenue has grown 33% and free cash flow per share has more than tripled.

Wall Street took notice. The company’s share price and price-to-sales (PS) ratio increased significantly. But that shouldn’t scare off potential investors.

NYT Chart

NYT data by YCharts

After starting to charge for online content in 2011, subscriptions have become a growing part of its business. . Although many pundits believed the media wouldn’t be able to monetize content other than through advertising, The New York Times proved them wrong.

A better business model

The company has two important trends in its favour: subscription revenue and digital content. Wall Street loves subscriptions because they provide a much more predictable stream of income than having to continually earn sales. At the end of 2020, 67% of the company’s revenue came from this way.

A chart showing much higher digital sales growth than print.

Data source: The New York Times. Chart by author.

It was also the year digital revenues exceeded print revenues. As you might expect, publishing content online is much more profitable than printing and distributing physical newspapers.

The EBIT margin – the percentage of revenue that turns into profit before paying interest and taxes – has grown from 3% to 14% in just over five years. This explains why investors are willing to pay so much more for every dollar the New York Times reports. It generates more profits.

There is still a lot of growth to come

With a powerful brand, there are many avenues for growth. During the February earnings call, CEO Meredith Kopit Levien noted just how much potential growth there is when she said:

Our latest audience research suggests that there are now at least 135 million adults worldwide who pay or are willing to pay for one or more subscriptions to English news, sports, puzzles, to recipes or expert shopping advice.

Compare that to the subscription numbers above and it’s clear the company has a huge market it can still reach. Two recent acquisitions show just how serious Levien is about it.

In January, she acquired Athleticism — an online sports news outlet — for $550 million. The deal brought in an additional 1.2 million subscribers.

Later that same month, he purchased Wordle. The online word game was only released in October and already has millions of daily players. It’s a nice compliment to the company’s signature crossword.

A way to take advantage of market volatility

With an iconic global brand, a huge addressable market, and a management team making investments to leverage it, the stock would be attractive on qualitative factors alone. Add to that growing profitability and The New York Times climbs high on my radar.

The valuation could be three times what it was when Americans voted in 2016. But the company is living up to expectations. Stocks are down 26% from their recent all-time high and I expect to be a buyer on further weakness.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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