New York Times stock (NYSE: NYT), a diversified media company that includes newspapers, internet businesses, television, and radio stations, gained roughly 40% – increasing from about $32 at the beginning of 2020 to around $47 currently, outperforming the S&P500, which grew 30%. Why? While NYT continued to see a slowdown in advertising bookings due to the pandemic, the company also saw a higher volume in reader traffic during this period. Readers were likely looking out for details on the Covid-19 virus and were also probably interested in food coverage, games, and crosswords on the company’s site during the lockdown. It should be noted that almost two-thirds of the company’s revenues come from the subscription business.
But is this all there is to the story?
Not quite. Despite the recent gains, Trefis estimates New York Times Valuation at $50 per share, roughly 10% above the current market price based on two key opportunities.
The first opportunity we see is New York Times Revenue growth over the coming years. NYT’s revenues could grow by around 1.3x from estimated levels of close to $1.78 billion in 2020 to around $2.3 billion by 2023, representing a growth rate of roughly 8% per year (for context the annual growth was about 5% between 2016 and 2019). There are multiple trends that support this continued growth. Firstly, the company added 2.3 million net new digital subscriptions in 2020, of which 76% came for its core news product and the rest from other digital products (crossword, cooking, and audio products). Surely, readers likely converged onto the site for details on the Covid-19 pandemic, but NYT has seen growth in its digital subscriptions over the last few years as well. At the end of 2020, the company had a total of 7.5 million total digital subscriptions, up 43% year-over-year from 5.3 million in 2019. In the prior year, online subscriptions grew at a 23% year-over-year growth rate.
NYT plans to speed up the overhaul of its ads business after being hit by a cut in the advertisers’ spending. The company is working to concentrate its ad business in a smaller number of growing categories, like tech or financial services, where it can build multi-platform collaborations with companies such as Google. It should be noted that the declining ad revenue will put pressure on profitability for some time and consequently, the company is planning to cut costs (including possible job cuts).
The second key opportunity stems from NYT’s valuation multiple compared to its peers. The stock now trades at a premium of 53x its projected 2021 adjusted earnings per share of about 92 cents, per Trefis estimates. This is comparable to its peer, News Corp, trading at 52x forward earnings. However, we believe that NYT deserves this premium in multiple, given the decent revenue growth it has posted over the previous years, and a trend that is expected to continue going forward. For perspective, NYT’s revenue grew 2% between 2018 and 2020, compared to flat growth for News Corp over the same period. (News Corp’s fiscal year ends in June) While we acknowledge that NYT’s revenue base of around $2 billion (in 2020) is much smaller compared to around $9 billion for News Corp, still the growth NYT has posted is meaningful. Now, if we were to look forward, NYT’s revenues are expected to grow 18% over the next two years, compared to a marginal growth expected for News Corp.
To further strengthen our argument on NYT’s multiple, let us look at the bottom line expansion. NYT’s GAAP earnings have grown a large 5x between 2017 and 2020, whereas News Corp’s earnings declined from a loss of $1.27 to a loss of $2.16 during this period. As such, we believe a P/E multiple close to 53x will be appropriate for NYT stock. Our price estimate of $50 for NYT stems from a 54x P/E multiple and 95 cents in adjusted earnings per share in 2021. This implies around a 10% premium to the current market price of $47.
While NYT stock may move higher, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New York Times vs. Vertex Pharmaceuticals shows a disconnect with their relative operational growth.