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