New York Times Stock: Expensive, But On The Right Track (NYSE:NYT)

It’s probably needless to say that the COVID era has accelerated the digitization of our lives and sped up the process of technology eating legacy industries. In my view, few industries are as close to being on the chopping block as traditional media. With more and more people getting news headlines from both social media apps as well as free news sources, we have to wonder if even ten years from now, journalism will continue to exist in its present form.

The New York Times (NYSE:NYT) Company has been hard at work combating this. It has emphasized its digital subscriptions (arguably earlier than most of its rivals like the Wall Street Journal and the Washington Post have), acquired The Athletic to beef up its sports content, and put together product bundles to try to keep engagement up and ARPUs high.

These efforts have earned the New York Times a ~30% price jump over the past twelve months. The stock initially dipped this year, but rose again after posting strong Q1 results that featured an acceleration in revenue. The question for investors now is: does the Times have room to run further?

I last wrote a neutral opinion on the New York Times in October, when the stock was trading closer to the low $40s. Since then, the company has continued to post strong subscriber trends, but at the same time the stock price has also correspondingly risen to account for that.

Now, we have a new worry for the New York Times: valuation. It’s difficult to pinpoint the Times as a growth stock (revenue growth is hovering just in the single digits), and yet the company commands a premium valuation multiple. For next year FY25, Wall Street analysts are projecting $1.96 in pro forma EPS for the Times (data from Yahoo Finance), representing 10% y/y earnings growth, on the back of $2.7 billion in revenue (+5% y/y).

While it’s true that the Times has been able to reverse its situation and grow revenue faster than expenses over the most recent few quarters, a mere ~10% earnings growth next year (and 10% earnings growth implied in FY24 consensus EPS of $1.76 as well), isn’t good enough to justify the Times’ valuation multiples:

• 25x FY25 P/E
• 27x FY24 P/E

Now, there aren’t very many pure-play public comps here – but considering The Times doesn’t have many growth drivers on the horizon, it’s unclear why the stock should trade at a premium to the S&P 500 (sitting at a high teens valuation multiple). Subscription net adds are stabilizing but not accelerating, and growth in subscription revenue and ARPU is partially offset by continued declines in print (where print advertising revenue, in particular, was a big cash cow for the company in the past).

We note as well that the stock has tended to sit at a low/mid-20s forward P/E multiple for most of this year prior to the recent spike:

And to me, there also remain a number of risks on the horizon beyond valuation:

• Heightened newsroom costs. As wage inflation continues to be rampant, it’s very likely that the Times will have to continue to pay its journalists more to keep up.
• Will bundlers and promo sign-ups stay on? The New York Times runs frequent deals and promos to sign people up to its bundles and subscriptions. Once the intro rates have reset, subscriber stickiness will continue to be an issue: especially as there is a lot of competition for the news.
• Will people continue to pay for the news? The internet and a variety of applications are now serving up news for free. Social media applications like Twitter and Instagram now somewhat function as a news-absorption channel for many younger users. Looking ahead to the future, the concept of paying for news may cease to become mainstream.

All in all, while the Times’ recent digital subscription revenue acceleration is impressive, this is already more than factored into the stock’s premium price. I remain neutral on this name, and lean towards the stock having more downside than upside.

Q1 overview

Let’s now go through the Times’ latest quarterly update in greater detail. A trended view of the Q1 results is shown below:

The company added 190k net-new subscribers in the quarter, and 210k digital-only subscribers in Q1 (down sequentially from 300k in Q4, but the last quarter of the year tends to see a lot of promotional activity that drives a seasonal spike).

Notably, ARPU continued to grow 1.9% y/y to $9.21, which is a reflection of more and more subscribers opting for bundles. Bundle subscribers now account for 43% of the Times’ total subscription base, up from 41% in the year-ago Q1.

As shown above, total subscription revenue grew 7.9% y/y, while digital subscription revenue grew 13.2% y/y. This was more than enough to offset roughly flat y/y revenue in print (comps are now getting easier here, which presents better optics for the Times), and notably also accelerated from 7.2% y/y digital-only subscription revenue in Q4.

To date, the company notes (without reporting churn) that it has been successful in graduating subscribers from promotional rates to fully paid plans. In addition, management also noted that advertiser demand has picked up in Q2. Per CEO Meredith Kopit-Levien’s remarks on the Q1 earnings call:

We delivered another quarter of the modest year-on-year ARPU growth we’ve been targeting since 2022. Our ability to successfully transition subscribers on promotional prices to higher prices is a durable driver of ARPU expansion and the primary reason we’re confident we’ll see continued ARPU growth this year. Total advertising revenue came in slightly better than guidance, thanks to print declining less than expected. We continue to feel the impact of some marketers avoiding certain hard news topics last quarter.

Even still, we are seeing a pickup in advertiser demand so far in Q2 and we’re steadily expanding our high performing ad products across the entirety of our product portfolio, which together give us optimism.”

On the cost front, the Times managed to keep adjusted operating costs roughly flat, up 2.2% y/y to $518 million. Newsroom costs (cost of revenue) increased due to continued investments in journalism talent, but we do note that sales and marketing and G&A costs did decline, partially as a result of the company’s restructuring.

Adjusted operating margins hit 15.2%, a 290bps boost from 12.3% in the year-ago Q1, while pro forma EPS of $0.31 beat Wall Street’s consensus of $0.21 with 48% upside.

Key takeaways

There’s no doubt that the New York Times delivered a strong Q1, but in my view, that strength is already embedded into its stock price. A mid-20s P/E is too expensive for a company that bears more long-term secular risk than opportunity, as journalism continues to flounder and fight to remain relevant. Continue to maintain caution here.