New York Times: Losing Focus

Summary

• The New York Times' ~40% decline in share prices this year has been accompanied by an erosion in profitability.
• In an order to bolster growth, The Times has turned to a dilutive M&A strategy that has watered down its profits.
• In its core newsroom business, rising costs are eating into EPS.
• The stock's ~28x forward P/E remains incredibly expensive in a recessionary market environment.
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We can't argue with the fact that the New York Times (NYSE:NYT) remains one of the most trusted and high-quality brands in journalism not only in the U.S., but across the globe. In spite of the quality of this brand, however, The Times has lost a lot of its luster as a stock. At one point, the New York Times delighted investors with its digital subscription growth, as evidence that the company was moving away from its largely paper-driven business into a more modern online subscription model. But in the choppy 2022 market environment, bottom-line profits are king, and The Times' scant growth (bolstered in no small part by promotional rates) is not nearly enough to keep up with inflating wages.

Year-to-date, the New York Times has lost nearly 40% of its value. Though it may be tempting to buy this news champion on the dip, I'd recommend that investors hold back.

Data by YCharts

The New York Times recently released Q1 earnings results in May, and the print does nothing to change my bearish view on this name. To me, here are the key reasons that I think the Times still has much further to fall:

• Organic growth is faltering. Digital revenue growth has fallen to the low-teens, and the pace of subscriber additions is paling in comparison to 2020, which was a super-cycle year for news (COVID plus a presidential election). To boost its growth, the Times has turned to acquiring several different companies, including The Athletic and Wordle.
• Losing focus? The acquisition of The Athletic makes sense. But the addition of Wordle only has a loose connection to the Times' long-standing history of crossword puzzles. It has become apparent that The New York Times is primarily interested in purchasing companies to keep up digital subscriber growth numbers at any cost, even when large purchases like The Athletic are dilutive to the bottom line. In my view, management is spreading itself too thin in trying to form a conglomerate of different news brands and games.
• Inflation is a real profit killer for The Times. Unfortunately, we are already in an age where lots of news is available for free (or consumed in other ways, such as via social media) - so the thought of raising prices is unthinkable. In fact, The Times' chief tactic for attracting new subscribers is via lowball introductory offers, such as $1/week for four weeks. At the same time, inflationary wage pressure means that The Times is having to shell out a lot more to keep its newsroom staff afloat. This exploding cost burden, plus the losses at recently acquired companies, is eroding The Times' profit margins.
• Expensive valuation. The New York Times is hardly a growth stock anymore, and its business fundamentals are a grab bag of problems as described above. Why would any investor want to pay a premium for this stock? Unfortunately, this is the reality at current share prices near $30, which stands at a 28x forward P/E versus Wall Street's consensus pro forma EPS of $1.04 for the year (data from Seeking Alpha). To me, this means the Times' already-sharp declines from the start of the year still have further downside steam.

The bottom line here: to me, the New York Times continues to sit on a heap of problems with no easy solution. The company is aiming to boost subscriber numbers because it is highly sensitive to the fact that Wall Street watches subscriber counts like a hawk - but products like The Athletic are also sold the New York Times way (currently on offer for $1/month for six months!). But revenue growth is not nearly enough to keep up with rising newsroom costs, and the Times' profitability has sunk faster than its share price. Avoid this stock and invest in higher-quality rebound plays.

Q1 recap

Let's now go through the New York Times' latest Q1 results in greater detail. The Q1 earnings summary is shown below:

New York Times Q1 results (New York Times Q1 earnings release)

In Q1, The New York Times' revenue grew 14% y/y to $537.4 million, actually missing Wall Street's expectations of $543.4 million (+15% y/y) by one point. And note that a large chunk of this growth was inorganic: the company owned The Athletic for two months during Q1, which had no comp in the prior-year period. The Athletic contributed $12.2 million, or 2% of the company's revenue, within Q1.

Subscribers grew to 9.1 million in the quarter, of which 8.3 million were digital-only. This seems like a large leap from 6.8 million digital-only subscribers at the end of Q1, but 1.1 million were acquired via The Athletic. Organic subscriber growth was 387k in the quarter - which is decent, but note that the company added 2 million digital subscribers in 2020.

New York Times subscriber counts (New York Times Q1 earnings release)

Note that I don't really ascribe too much value to new subscriber growth, given the Times' tendency to lure in subscribers via nearly-free subscription rates for an extended trial period (another red flag - the company's digital ARPU fell -1% y/y and -5% sequentially versus Q4, driven by the cheaper Athletic subscriptions). It would be interesting to see the company's churn rates, which it does not report.

Profitability was the main black eye in the quarter. Adjusted operating margins, which already excludes the impact of one-time costs related to the Athletic acquisition, fell 310bps to 11.3%, and adjusted operating profit dollars declined -11% y/y to $60.9 million.

New York Times operating profits (New York Times Q1 earnings release)

Meredith Kopit-Levien, the company's CEO, noted that The Times remains in "investment mode" and isn't too focused on optimizing for near-term profits during her prepared remarks on the Q1 earnings call:

The Company's cost growth in the first quarter reflects our continued investment priorities. Growth in the number of employees creating content across our news and lifestyle products and growth and product development to make the delivery of that content even more engaging in habit forming.

As we've long said, we won't sacrifice long-term growth in the name of short-term profit. We do expect these investments to drive improvements to our marketing efficiency and we also expect to see benefits over time from our tech investment as our platforms and underlying capabilities continue to improve."

Key takeaways

In my view, the New York Times will continue to struggle through its multitude of issues, including slowing organic digital growth, an inability to raise prices due to intense competition for news, and inflating newsroom costs. Trading at nearly a 30x forward P/E, this investment just doesn't make sense.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.