The New York Times Company (NYSE: NYT) announced on August 29 that it will be selling the About Group to InterActiveCorp (IAC) for approximately $300 million. ((Form 8-K, SEC)) This might be its last major asset sale as it been selling off its fringe divisions to focus more on its core business offering; the firm sold off its stake in Fenway Group and its regional newspaper division earlier this year. Our model has now been updated for the sale of About.com, and our price estimate has increased slightly to $7.31.
Along with the sale of its fringe assets, New York Times has also shuffled things at the top. It has brought in new CEO Mark Thompson, who previously worked as an executive at BBC. The sale of About will give the new CEO a large amount of cash that he can use to help NYT gain a solid footing on the digital front. We expect most of the money to be spent on improving the company’s digital offerings because the company, to its credit, recognizes that the print newspaper industry is in secular decline. Below we will examine the company’s most important digital drivers, and the impact that an increase in successful digital investment can have on NYT’s value:
- How Much Of NYT’s Value Comes From Digital Subscriptions?
- How Important Is The Digital Advertising Business Becoming For NYT?
- How Much Upside Can An Increase In Digital Subscribers Drive For NYT?
- What Can Drive A 10% Downside To NYT’s Stock In The Next 2 Years?
- How Is NYT Expected To Grow In The Next Five Years?
- What Drove NYT’s Revenue And EBITDA Growth In 2015?
According to our estimates New York Times’ print circulation and digital subscription business is now worth approximately 42% of its total value. While its print circulation revenue currently makes up a substantial portion of the divisions value, we expect that this revenue will decline going forward. However, we expect that the company’s online subscription will offset some of the decreases, raking in $261 million by 2018, up from $165 million in 2013. If Mr. Thompson deploys the cash from the About sale wisely, we think that if the company can be successful in implementing digital strategies which attract new users. If NYT’s digital subscription base rises, we would see upside to our price estimate. If NYT’s online subscribers increase to 2 million by the end of our forecast period, NYT’s value would rise approximately 10%.
NYT, with the cash from the About.com sale, might venture into providing some services free of charge. We think that a logical step would be to improve its video service, especially since it can leverage Mr. Thompson’s experience at the BBC. If the company provides some of these services for free, we can expect that it would be able to monetize them via advertisements, thereby substituting some print ad revenue with digital ad revenue. Therefore, another area of the company’s value which we think would be directly impacted by its digital focus would be its Online Advertising segment, which currently makes up approximately 25% of its value. An increase in revenues per page view (which should materialize if the company’s digital offerings are successful in engaging users) to $32 per 1000 visits, by 2019, would provide 5% upside to our price estimate.
As usual, when a company’s primary business model is under threat from secular industry trends, it seeks to expand or maintain its value via other avenues. In NYT’s case, the company will focus on the digital front when it makes new investments. However, if the company’s investments don’t pay off over the long run, we would see the company waste cash and destroy value for shareholders.
Overall, NYT is a company at the edge of a cliff. It has no choice but to jump into the highly competitive world of digital media, and has taken the right step in hiring a CEO with vast digital media experience. We will be keeping an eye on the company in the coming months, expecting new investments on the digital front.
We currently have a $7.31 price estimate for New York Times, which is approximately 20% below the current market price.