The Bundling Times
A business rightfully priced at a premium
The New York Times (NYSE: NYT - $7.57 billion) is a company that is known for producing news content, being one of the largest newspaper companies in the United States. While their successful strategy to execute a digital pivot for news since 2016 has been notable, there are other factors of the company that I believe are underappreciated. From investments that put The Times ahead of the curve on where marketing dollars are shifting to a unique bundling strategy anchored by a rapidly growing non-news segment, the company’s premium valuation is more than justified and I see an additional 12.4% annual upside on the stock.
The Non-News & Bundling Plan
Excluding the acquisition of The Athletic which closed in February, The New York Times had 8.005 million digital subscriptions at the end of 2021. What one may not assume hearing this number alone is that 2.138 million, or 26.7% of digital subscriptions, are explicitly for non-news products offered by The Times. In particular, these include their Cooking and Gaming subscriptions, both of which crossed a million subscriptions late in 2021.
Despite being a small amount of total revenue to date, the growth rate of this non-news segment stands out. Since 2016, subscriptions to non-news products offered by The Times have grown annually at a rate of almost 54%. Revenue growth for the segment matches this growth rate as well. While this CAGR will decelerate over time into the low/mid 20% range over time (my opinion), the design around these products encourages constant engagement from customers that will be accretive to the business.
Most games, whether free to download or AAA require an upfront cost and no subsequent barrier to the amount of time you can play. Games offered by The New York Times have a different model. Users have to pay a fee monthly or annually to receive content. Furthermore, the amount of times you can play a game each day is capped, forcing people to have to be engaged with the product daily and limits the likelihood someone gets burnt out by the games offered and opts to cut the cord, minimizing the churn rate.
This is why Wordle was a perfect game for The Times to acquire. It’s designed to be a game you can only play once a day, forcing people to have to come back to the product constantly just like the other gaming offerings The Times currently has. It’s a niche market but one with a large audience that has a significant runway in monetization.
There’s also an interesting way to see how popular the game currently is. An automated Twitter bot tracks all wordle scores posted each day. While this depicts just a fraction of the daily users, the fact that over 100,000 people are posting their results each day shows that there is residual popularity.
Games are just one piece of the bundling pie. Owning one of the largest online cooking sources and sourcing an additional 12 million monthly visitors from Wirecutter, The New York Times has increasingly sought to create a bundled offering that makes it a necessity for English-speaking people to engage with their interests.
This strategy of moving beyond news isn’t just a business decision to reduce cyclicality from election cycles or to limit one-off uncontrollable events as growth catalysts. Bundling has material benefits in retaining users and profitability.
Over 30% of our subscribers now pay to access more than one of our subscription products. Subscribers to our existing bundle have lower monthly churn rates than News-only subscribers and significantly higher ARPU (CEO on Fourth Quarter Conference Call)
This comment is particularly important when knowing that the average person will only pay for one news/information source at a time. With that information about the competitive landscape, companies taking actions to both increase their customers’ propensity to spend on their products and to lower the odds someone substitutes their product for a peer is crucial. The bundling strategy of The Times favorably addresses this for the company.
It also makes the company’s acquisition of The Athletic make much more sense, even if the acquisition was at a rich price despite synergies. While the market’s reaction to the acquisition was initially negative, in part due to a poor buyout history from decades ago and the high valuation that was paid, combining the scale of The Athletic with the distribution of The Times as they’ve done with Wirecutter will put a major squeeze on local & small news organizations.
The Times can now offer a unique bundle of international, national and local news that offers readers a value proposition better than that of many local newspapers with eroding sports coverage and whose news sections largely consist of wire copy from The Associated Press, Reuters and even The New York Times’ syndication service. (WGBH)
Bundling offerings could also be a way to combat “subscription fatigue,” where a person’s willingness to pay for a subscription goes down as the number of items to subscribe to goes up. Either way, this strategy is poised to serve as a propellant to both the top and bottom lines in a way that the street’s light coverage may underestimate.
While The Times has made a strong digital pivot to avoid the decline of its print business, what they’ve done to get ahead of the curve in the advertising market is more impressive. Not only do their decisions in data usage give an advantage, but early investments in places where marketing dollars are shifting towards have put the company in a place where it can benefit from multiple tailwinds in the industry.
The company has only been using its proprietary first-party data for advertising purposes for some time. The result of which is a competitive advantage in a market where third-party data is quickly phasing out and companies without investments in effectively collecting user data on their own have been falling behind. With cookies on Chrome also being phased out in the coming years, The Times digital advertising should face further tailwinds as they’ve already seen no impact from Apple’s privacy changes in 2021.
in terms of impact from Apple and I'll add that we think our own proprietary first-party data products make The Times a compelling place for marketers, particularly in an environment where people are more concerned not less about privacy. So, no particular impact and we think the winds are blowing in our direction. (CEO on Fourth Quarter Conference Call)
The company’s in-house advertising company, T-Brands, also works to leverage the creative talent of the company to make compelling ad campaigns. With personalization becoming increasingly important in marketing as privacy has, not having to outsource critical parts of the sales process to companies is a distinct edge.
This plays into the company’s theme of having proactive investments, something that I’ve been able to better understand based on conversations with employees of The Times about the company’s culture. The digital-first priority of the company culture and not wanting to fall behind as they were in the early 2010s fuels decision-making to explore new media formats early on, something they’ve executed with particular strength when it comes to audio.
The Times launched The Daily podcast in early 2017 when there were only 46 million podcast listeners in the United States. Not only has this market nearly doubled to over 82 million listeners, but The Daily has become one of the largest podcasts globally. According to The Times, it has “millions of daily listeners,” and third-party sources rank it as either the most-viewed podcast or in line with Joe Rogan’s podcast.
The strength in the positioning of the New York Times with these factors I’ve listed about their advertising business is that they’re not just capitalizing on growth in the digital ad market, but through strong investments have set their ad business up to gain a higher share of advertising dollars as the shift in marketing spend to content production and those with first-party data continues.
These are key differentiators in a high-margin part of the company that I believe current sell-side analysts have underestimated. After 2022, the average expected growth rate of the digital advertising business of The Times by public analyst estimates is just 4.14%. When considering the past 5-year growth rate of 8.13% while developing their investments, tailwinds to their positioning, and ability to increase monetization of The Athletic, I view this estimate as inadequate. For the next 5-6 years I anticipate digital advertising growth to surprise to the upside with over 15% annualized revenue growth for the segment.
What’s the Catch?
So key positives include a strong bundling strategy, squeezing out local/smaller news providers to consolidate the industry, and an undervalued advertising segment. What’s the catch? Well, there are a few risks worth mentioning.
All voting shares are owned by a family trust. Their interests may not always be aligned with shareholders
Reputation/brand risk is particularly high in this space, impairment of reputation can have material negative consequences
The print business, both subscriptions and advertising, remain in secular decline. Effectively managing the decline of this portion of the business is vital to the company
To the prior, continuing to be ahead of the curve on changes in the digital space will require continued investments and forward-thinking. Impairment to the company culture I’ve assessed could be a risk
The voting shares issue is a risk simply because shareholders can’t directly sway the company. Obviously, the trust wants the stock to rise but their lack of a large ownership stake in the company’s common stock means other motives could arise.
I also want to touch on the print business decline. This has been ongoing for over a decade now and won’t stop. What’s important is to assess the rate of future decline in this business. Similar to how sell-side coverage underestimates the strength of the digital advertising business, I believe that sell-side forecasts for decline in the print business, particularly advertising, are harsher than what will likely occur. The sell-side consensus currently forecasts a near 10.5% annual decline in print advertising revenue. I believe this will be closer to a 6% annual decline over the next five years.
Print subscriptions are also something I believe will taper at a relatively slow rate as remaining subscribers have a high propensity to pay (average revenue per print subscriber in 2021 was $750), and future pricing decisions can partially offset decay in print subscribers. I cannot forecast when future price hikes may occur, but in consensus see this business declining at about 2.6% a year going forward.
All the information I’ve talked about is great to have but it doesn’t mean anything if it cannot be contextualized into numbers to understand what a stock may do in the future. For that, I’ve modeled not just an income statement, but revenue projections for different portions of the business for the next five years.
The projections for each segment aren’t too complicated and are as follows
Digital & Print Subs: Go by a formula of projected subscriptions times the revenue per subscription (uses old company reporting model, not new unique subscriber reporting method)
Digital Ads 20% growth in the period with growth rate tapered by 10% in each subsequent period
Print Ads: 7.5% contraction in the first period with loss rate tapered by 10% in each subsequent period.
Other: Grows at the 2-year CAGR from 2019 to 2021
The main drivers of outperformance in topline growth, when compared to the scant sell-side coverage of the company going out in time, is high conviction in the company’s advantageous position in digital advertising leading to outsized growth, success in the bundling strategy to drive growth on digital, and the ability to continue managing the secular decline of the print business. I actually forecast digital subscription revenue to grow faster than digital advertising, but the discrepancy between my modeling and the sell-side consensus is much larger on a percentage basis in advertising.
For subscriptions, I modeled revenue based on revenue per subscription and subscriptions. This model can be seen here.
Within this, I give an initial bump on the churn rate for print subscribers and normalize it at its prior 4-year CAGR of -4.02%. Revenue per print subscriber is also normalized at its 4-year CAGR of 1.94%.
The digital side has more moving parts. The Athletic is included in the “News” portion of subscriptions in this case leading to the bump in the first projected year, and the other years are normalized at a long-term rate with sequentially declining growth. Revenue per total digital subscriber (this is what is used in the model), declines 10% in 2022 as The Athletic impairs revenue per subscriber initially. However, this grows at a slow pace thereafter as integrations with bundling grow revenue per subscription, partially offset by promotional activity. It should be noted in this that I project subscriptions per unique user to materially rise over the forecast period.
When the pieces are put together, this is the 5-year revenue model that I currently project. Here are the assumptions for costs
COGS ex. D&A grows by 20% in 2022, 12% in 2023, has a growth rate that sequentially declines by 1% annually after
D&A shrinks by 5% in 2022 and 2.5% in 2023 but begins an accelerating growth pace as the renewed investment cycle flows into D&A
R&D growth matches sales growth
SG&A growth matches sales in 2022 and grows at 10% annually thereafter
Non-operating slows to no change by 2026
The tax rate is 24%. This is above the 5-year average of 18% but realistic
The 2022 cost growth in particular can be associated with integrations of the Athletic. In fact, I don’t have net margins recovering to 2021 levels until 2025, but the topline will be growing at a pace that EPS will be above 2021 levels by 2023. With minor share dilution, this leads to a projection that EPS will grow by 95% within the next five years.
My 2026 net income forecast has already been seen, but I want to touch on how I came to a 30x P/E multiple to get my end of 2026 price target of $76.44. While the company’s long-term average for a P/E multiple can be distorted by years like 2020, years without disruption since the digital pivot in 2016-2017 have had an average P/E of 34.8x. This is certainly a premium when compared to the industry that The New York Times operates in, but a premium that is more than justified considering that compared to competitors the company has better margins, higher growth forecasts, and a much healthier balance sheet.
Despite these pros, the company does have to manage the operation of a part of its business that is in secular decline. To me, this warrants somewhat of a discount in how I value future earnings for the company, so a roughly 13% haircut to its current P/E multiple to get to 30x is something I deem as reasonable.
Putting all these pieces together, and assuming some minor share dilution, My end of 2026 price target of $76.44 implies an annualized return over the next 4.75 years of 11.67%. However, this does not include dividends. The company’s current forward dividend yield is 0.795% at $0.36 per share. Assuming this dividend grows at $0.06 per year going forward, my actual expected return including dividends is 12.40% per year over the next five years.
Compared to the market’s annual return of 8%-10%, this isn’t a massive once-in-a-lifetime opportunity. However, it’s still a stock that could generate material outperformance in my base case scenario. To me, it’s not a gem that I see with over 20% annualized return potential as I personally see in Build-A-Bear for example, but it’s still potentially a good stock. At the end of the day, I write these not to give ideas with massive outperformance for each post, but to learn more about companies. That’s something I love doing and hopefully won’t have to ever stop.
Thanks for reading, tune in for the next deep dive on April 25th that will cover a social media company that I believe is massively overvalued.
This article is not investment advice and only represents the thoughts of Strat Becker. You can reach me by email at RealStratBeckerYT@gmail.com, on Twitter @StratBecker, or on Commonstock @Strat. This article is for subscribers of the Theta Thoughts newsletter. If this was shared with you please consider subscribing to receive free stock analysis like this every Monday.
Disclaimer: I hold no position in The New York Times as of the time of writing and am receiving no compensation to write this article.