Investors in The New York Times Company (NYT) have had a good time lately, watching the stock rise to $10, which has netted them a return of over 40% in the last three months. We think one of the catalysts for the rapid rise was NYT’s renewed focus on digital offerings, which was strengthened by the divestiture of non-core assets such as the About Group. However, in contrast to the market, we aren’t so bullish on the company’s prospects. We think that, in particular, the market is too optimistic on digital subscription and revenue per page view growth. Additionally, the market seems to be ignoring the impact of negative secular trends on the company’s print division.
Currently, New York Times has approximately 500 million digital subscribers, and we expect this number to increase to approximately 1.5 million by the end of our forecast period. We think that, in its optimism for NYT’s digital subscriber growth, the market is ignoring competition from other online newspapers and mobile applications, such as Flipboard.
The company’s reach, measured by readership in print and online formats has been decreasing steadily over the last three years, according to the Pew Research Center. This decline occurred during the time when NYT’s digital platform was up and running, signaling that the increasing competition online is cannibalizing the company’s user base.
Additionally, even if we are wrong with regards to our growth forecasts, we don’t think there is enough upside potential to digital subscription growth to justify NYT’s current market price. We already estimate that digital subscriptions would increase by 1 million over our forecast period, and think that the company would have to drive rapid organic subscriber growth to see a meaningful upside. Unfortunately for NYT, we don’t see this happening in an industry with such intense competition.
Daily Print Circulation
The print newspaper industry is going through a period of secular decline with readership decreasing across age groups. We think the availability of news online might render print newspapers almost useless over the long term. Overall, the market is likely underestimating the strength of these trends as well as competition that NYT faces from TV news and online sites.
Additionally, print newspapers don’t have strong network effects, which have become very important for content providers in this age of social networks. A lot of news media is consumed due to “frictionless sharing,” where an article receives free publicity among a user’s connections on a social network. The sharing causes a snowball effect as more content is consumed via social networks. Print newspapers, on the other hand, can’t leverage these trends since most of their information sharing is done via word-of-mouth.
Revenue per page view
Revenue per page view (RPM) is a key driver in our valuation of NYT’s online advertising division, which makes up approximately 25% of the company’s value. We forecast that New York Times’ revenue per page view for its digital offerings will increase slowly to approximately $26 per 1000 visitors in 2019. We aren’t forecasting faster growth for this segment because we believe that intense online competition poses serious headwinds for NYT.
The company doesn’t necessarily have a ‘social’ platform such as Huffington Post’s Huff Post Live, and is unlikely to generate meaningful data about a user’s interests, which can then be used to generate targeted ads. Due to these shortcomings, we think that advertisers are more likely to spend their ad dollars on websites that engage users at a much deeper level, limiting NYT’s revenue per page view growth potential.
We currently have a $7.31 price estimate for New York Times, which is approximately 25% below the current market price.