New York Times: Thriving Amid The Decline Of Advertising Business
Summary
- In Q2, the New York Times’s subscription revenues increased by 8.4% Y/Y to $293.2 million, while the advertising revenue declined by 43.9% Y/Y to $67.8 million.
- Despite showing a decline in total revenues during the quarter, the company made a profit and beat its EPS estimates by $0.15.
- With ~$750 million in cash and no debt, the New York Times continues to pay dividends and I consider it to be a safe long-term play for media investors.
New York Times (NYSE:NYT) is one of the few legacy newspapers that was able to reinvent itself and thrive in the age of digital disruption. While the traditional advertising industry continues to decline amid the rise of tech disruptors like Facebook (FB) and Alphabet (GOOG)(GOOGL), who control the absolute majority of the online advertising market, New York Times found a way to offset the losses of its advertising business and secure its long-term growth. By pivoting to the subscription business model a few years ago, the company was able to get more than 6.5 million paying subscribers, who generate the majority of income for the business.
Since the beginning of the year, the New York Times stock appreciated by nearly 50% and it has even more room for growth, as we approach the upcoming Presidential elections. With more than $750 million in cash and no debt, the New York Times continues to pay dividends and I consider it to be a safe long-term play for media investors. For that reason, I'm long New York Times.
Subscription-First
As the newspaper and traditional advertising businesses are dying, the New York Times is able to thrive. After deciding to fully pivot to the subscription-based model five years ago, the company experienced an unprecedented growth of its earnings and was able to create value for its shareholders. In Q2, the New York Times's subscription revenues increased by 8.4% Y/Y to $293.2 million, while the advertising revenue declined by 43.9% Y/Y to $67.8 million. As a result, total revenues were down 7.5% Y/Y to $403.75 million, above the consensus by $14.5 million. However, the company made a profit and its non-GAAP EPS in Q2 was $0.18, also above the consensus by $0.15.
In addition, in the first half of the year, New York Times saw an unprecedented growth of online traffic, as more than two and a half billion pages were viewed during a single month at the beginning of the year, twice as much in comparison to the average month. At the same time, it reached the highest number of unique users in a month in its history (~240M) and during the first months of the coronavirus coverage, the New York Times gained more than 600 000 additional subscribers.
All of this helped the company's stock to quickly offset the losses from the early March selloff and now the shares are up nearly 50% since the beginning of the year.
Chart: Seeking Alpha
Pivoting to the subscription business model was probably the best decision that the New York Times ever made. At the end of June, the company already had 6.5 million subscribers and it's well ahead of its goal to achieve 10 million subscribers by 2025.
Source: New York Times
The upcoming Presidential elections will serve as the biggest catalyst for growth for the company. As an established news media business with a history of covering all major political events, the New York Times has always been able to gain new followers and get new foes. The constant attacks from President Donald Trump gave New York Times a major spotlight during the press briefings and in a way helped the company to gain new subscribers, as people who disagree with the President were more willing to support the company via subscriptions. As we are nearing the elections, the New York Times has all the chances to get another bump in subscriptions thanks to its coverage of the major political event of the year. At the same time, while the New York Times leans more to the progressive side of the political spectrum, its business will be able to grow during either a Republican or a Democrat Administration, just as it did so over the last two and a half centuries.
When it comes to its business, the New York Times made a smart move a couple of years ago to require all non-signed users to register on its website to read more than one news article. This helped the company to drive its engagement metrics higher and improve its conversion rate. In Q1 alone New York Times saw the number of people, who register and then return and log in each week surge to new records. At the same time, the company tested its new pricing strategy a while ago, which now yields positive results. By offering a $2 monthly subscription to read all of its content for the first year, New York Times is able to convert those, who were hesitant at first to pay for the content, and later get them to pay the full price of $8 per month and increase their long-term value to the business.
Despite all of this, it's very unlikely that the New York Times will be able to stop the decline of its advertising business, which never was able to recover to its pre-Great Recession levels. Over the last two decades, tech conglomerates Alphabet and Facebook have been disrupting the digital advertising space and increasing their market shares. By having the biggest advertising platforms in the world both companies are able to aggregate a vast amount of data, which no other company has. They are also able to give advertisers the ability to use that data by running target-specific ads on their platforms, which lead to better conversions and are generally cheaper in comparison to direct banner or other ads on websites like New York Times. As a result, New York Times advertising business steadily declined over the years and now accounts for less than a quarter of total revenues, while the circulation of its newspapers has been declining for more than a decade now. Back in June, the company already fired 68 people, who are mostly from the advertising team, as the management expects its ads revenues to decline 35% to 40% Y/Y in Q3.
The good news is that the New York Times has already been able to offset most of its advertising losses by the revenues from subscriptions and by investing in the audio content, which already yields positive results. In Q1, nearly 3 million of its audio content, which includes podcasts, has been downloaded on average per day, while the podcast advertising revenue has increased by 30% Y/Y during the quarter. There was also substantial growth in Q2. As the podcast advertising revenues are about to reach $1 billion in 2021, experimenting with the audio content is the right move in my opinion. The recent purchase of audio subscription app Audm shows that New York Times will continue to expand its business to minimize the impact of the declining advertising revenues on the overall company. In addition, the acquisition of Serial last month shows that the company has ambitions of establishing a stronger presence in the audio medium.
With $756.7 million in cash and no debt, the New York Times has more than enough resources to stay afloat and experiment with new business models that already yield positive results. While its stock trades at a forward P/E of over 50x, if we compare the company to other subscription businesses like Netflix, which has a forward P/E of over 80x, we could say that the New York Times stock is not as overvalued as a lot of people might think. While Netflix operates in a different medium in comparison to the New York Times, its subscription-based business model is the same. Since New York Times is already ahead of its schedule to achieve 10 million subscribers in the next few years, it's safe to say that the growth will continue, as there's a demand for the company's digital products. In Q3, alone the management expects to see its digital subscription business grow by 30% Y/Y. In addition, the New York Times continues to pay dividends and it has a payout ratio of nearly 25%, which justifies purchasing the company at the current price since its growth perspectives outweigh the risks.
This article was written by
Analyst’s Disclosure: I am/we are long NYT. 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.
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