The New York Times Company: Newspapers Are Boring But Making Money Is Not
The New York Times Company is generally considered a boring newspaper company, but it's undergoing a major transformation from print to digital.
Unlike the print business, the digital subscription business has extremely high incremental profit margins. Management does not break out the very different economics of the two revenue streams, which makes it harder to appreciate how profitable the company should be with greater scale.
While a wide range of outcomes is possible, my Base case values NYT at about $82 per share, which is 66% higher than today's stock price of $49.47.
Importantly, I think the long-term expectations implied by $49.47 per share are very achievable.
[Brief note: I used to think of these write-ups as "deep dives." I think of that term as meaning long form, comprehensive write-ups covering everything about a business starting with the basics. But I realized I don't actually think of my work this way because I don't necessarily start with the basics and I try to focus only on what I think is important. I intend for readers to use my work as a starting point for their own research. With that in mind, I try not to cover too many high level things that you already have or will read in the company's reports and filings. My hope is that even existing shareholders and long-time followers of these companies might learn something new or at least consider things from another angle they may not have previously.]
For a long time, I've been attracted to businesses whose primary cost is fixed cost content. That sort of expense can remain flat or increase only modestly yet can be used to generate revenue from a theoretically infinite number of users or subscribers. Netflix, Peloton's subscription business, and Spotify's nascent podcast advertising business are a few examples of this. The next user of each of these businesses comes with minimal variable costs, meaning each business can get increasingly profitable as it scales. In my experience, markets can underestimate the long-term profitability potential of businesses like this because most market participants tend to focus on much shorter-term considerations than operating leverage looking out many years. The possibility that margins should be much higher in five or ten or more years doesn't usually concern most investors who tend to focus on, and are usually judged by, their monthly or quarterly performance.
Netflix's variable costs include certain streaming delivery, customer service, and payment processing costs but it pays not a cent more for a given piece of content just because one more subscriber joins the service. Similarly, the next Connected Fitness subscriber for Peloton comes with some music royalty, streaming delivery, and payment processing expenses but that subscriber watches the same content that's already being made. And the owned and exclusive podcast content that Spotify has acquired or licensed allows the company to sell an infinite number of ad impressions against these largely fixed costs. Due largely to these dynamics, I would expect each of these businesses to be very profitable at maturity.
The New York Times Company ("The New York Times") is increasingly benefiting from a similar dynamic, but I wouldn't say it has meaningfully shown up in the numbers yet. The company is in the middle of a long-term transition away from a largely variable cost model—the legacy print business—to a largely fixed cost model—the digital business. That, along with significant ebbs and flows in the advertising businesses, might make it hard for investors to focus solely on the digital opportunity.
Exhibit 1 shows the gradual decline of the legacy print business and the rapid growth of the digital business in terms of the number of subscribers.