Apparently, in the year 2016, an alarming number of Americans are unable to decipher the difference between obscure conspiracy theories and actual world events. While I won't comment on how profoundly sad that statement reads, it is worth discussing its impact on traditional media. The New York Times (NYSE:NYT) remains the most read and one of the most respected news outlets in the country. With such high levels of uncertainty regarding basic facts, Americans are increasingly turning to media brands they know and trust. The years of declining revenue may finally begin to reverse as the new normal in political discourse emerges.
The Oxford dictionary named 'post truth' as the word of the year for 2016. Anyone tuning into recent world events can immediately understand the context of that decision. With the seeming explosion of "fake news" and little to no desire by social media companies to rein it in, traditional media may grow in stock as it has maintained a relatively solid reputation for fact-based reporting. In an attempt for higher ratings, many traditional media networks and newspaper have stepped into dangerous territory by giving voice to untrustworthy sources that regularly misinform.
Many in the public have been able to recognize this phenomenon. The select news outlets that resisted are being rewarded with massive subscription bumps. As other news outlets continue to cut costs and eliminate high expense in-depth journalism, The New York Times is investing in this space. Readers are noticing and subscribing to the times while abandoning some peers. Subscribers are longer lasting and reflect a more positive outlook than simple viewer gains that are inevitable in the lead up to an election.
Over the next four years, we are likely to see an onslaught of misinformation from formerly fringe elements of the media. If the 2016 campaign period was any indication, the next few years will likely see a blurring between uncontested facts and skewed innuendo. A recent Buzzfeed poll (don't worry, the methodology is sound) of 3,105 respondents found that 75% of regular news consumers were unable to distinguish a fake news story from the truth. The new administration may, in part, be adding to the confusion.
Donald Trump regularly retweets fake news stories, has appeared on fake news outlets, and repeated provable falsehoods in many speeches. Incoming National Security advisor, Michael Flynn, regularly promotes fake news and reposts it. Chief White House strategist, Steven Bannon, ran a fake news/political opinion website known as Breitbart. Other senior administration advisors, including Ben Carson, Rudy Giuliani, and Mike Pence, have also fallen for fake news stories.
With such high level government officials struggling to differentiate conspiracy theories from facts, Americans will regularly need to fact check for themselves. This provides the catalyst for more Americans to read and subscribe to the NYT. Not every news source is a reliable fact checker. CNN, Fox News, and The Wall Street Journal have all fallen for fake news or allowed contributors to push fake news stories. Some of those examples are here, here, and here. With so many people unable to distinguish solid facts from bogus stories, the New York Times is likely to continue growing its subscriber base.
Additional catalysts for growing readership are the widespread reports of state actors intentionally flooding US social media networks with fake news stories. The Director of National Intelligence (who oversees seventeen US intelligence agencies) confirmed that a foreign government produced and distributed news stories that had the intended purpose of influencing the American election. Given the success of that campaign, it seems unlikely that undermining the US public would stop anytime soon.
Most people value the truth. Those people, as they read about the aforementioned propaganda campaign by foreign actors, will turn to trusted sources for news that they know to be accurate. Even if one disagrees with the generally progressive views of the NYT, its reputation for factual reporting is essentially unquestioned. A Pew research survey found the Times to be one of the most trusted major news outlets in the country. Brand recognition and trustability will provide The New York Times a unique ability to grow readership in, what the Oxford dictionary calls, a post-truth country.
2016 has been a record year for the Times. Reports have suggested that, since the election, digital subscriptions have come at the rate of 10,000 per day. This has resulted in a tenfold increase in the number of subscribers in just a few weeks. Consumers are, in fact, willing to pay for premium content. A majority (54%) of revenues are circulation based. As the number of new subscribers skyrockets, that will lead to tremendous Q4 numbers. The strength of circulation leads to eventual increases in advertising revenue. Subscribers are significantly more engaged across the digital platform, and thus have the effect of creating higher margins for the NYT since they are paying to view and viewing more.
CNBC reported that the Times added 132,000 new subscribers in the three-week period after the election. President & CEO, Mark Thompson, elaborated on that figure at a UBS conference. He noted that the paper added 200,000 subscribers in Q4. That should result in a roughly 10% revenue increase for circulation, or roughly $239mm for Q4. In Q3, the times reported a slowdown in advertising revenues. The downturn was largely due to print, as digital advertising grew by 24% on a year-over-year basis. The 200,000 new subscribers in the quarter is a 72% increase in subscriber growth and a 13% increase in total subscriptions on a sequential basis. As the quarter continues, that number will only improve.
These numbers are necessary. Print readers are significantly more valuable than digital readers. Print subscriptions add about $874 of annual revenue per reader ($490 subscription fee plus $385 in advertising sales). Digital subscribers are less lucrative (though much higher margin), generating $180 in fees and $46 in advertising. Although we do not yet know the makeup of the 200k new quarterly subscribers, stemming the decline in print users and bolstering digital sales will cause an earnings beat.
The subscriber growth in the election lead up is predictable. People consume more news before elections. But the growth after the election, when most people usually tune out, is indicative of a new trend. Many Americans are understandably weary of the future, and for many, subscribing to the times or other reputable papers is a source of comfort.
It is also a way to express discontent. Never before has an American president expressed such explicit dislike for a single newspaper. The Times has been on the receiving end of many attacks from both the president-elect and many of those on his staff. The barrage of attacks only seems to help the Times. So as the attacks continue, readers seem willing to reward the Times for hard-hitting journalism.
In the past month, The New York Times stock has increased nearly 20% while peers have been flat. This only increases the already steep P/E for the NYT, which is now approaching 34x last year's earnings. Analysts are estimating $0.23 per share for Q4, which would contribute to FY2016 earnings of $0.51 (a multi-year record). A small earnings beat would bring the P/E down to about 22x 2016 earnings.
That puts the NYT at a discount to the S&P 500. With a high likelihood to grow the subscription base over the coming quarters and readers becoming more engaged in quality news, The New York Times is set to outperform peers and likely beat earnings estimates in the fourth quarter. Even with a recent run-up, investors have a great opportunity to enter this stock as growth accelerates and a Q4 earnings beat increases in probability.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.