The Case Against The New York Times Co (NYT)

New York Times Co (NYSE:NYT) has enjoyed a strong bull run over the past 20 months, more than doubling in value since the beginning of October 2016, just before the Presidential elections helped spur a surge in the iconic publishing company’s digital growth.

The winner of that election, one Donald J. Trump, would be a fan of Value Investors Club user MTHD, who recently detailed the bear case against the New York Times, one of Trump’s favorite “fake news” targets and winner of two of his Fake News Awards in 2017 (congrats). We’ll examine the bear case below and see if the good times are about to come to an end for NYT investors.

Will Slowing Digital Growth Offset Print Losses?: With print subscriptions and advertising continuing to decline at a steady pace, MTHD posits that New York Times Co (NYSE:NYT) requires digital subscription growth to remain at 2017’s elevated levels to offset the loss of revenue from the print side, especially as digital customers generate far less revenue than their print peers.

MTHD estimates that figure at $760 per subscriber per year on the print side and just $260 on the digital side. With sequential digital subscription growth falling back into the mid-single-digit percentage range in recent quarters, MTHD is skeptical that such a growth rate would suffice to outpace the print declines at the rate needed to maintain revenue.

However, the numbers don’t seem to support that claim, as mid-single-digit growth in digital subs should actually be more than enough to outpace the loss of print subs at the 3-1 pace cited as being necessary to avoid revenue declines. With three-times as many digital subs as print subs, growth in percentage terms that simply equals print’s declines in percentage terms would meet that rate. And as that divide widens further and further in the coming years, the pace of growth in digital subs will be able to slow even further.

In fact, when looking at it in that light, the entire print side of the business is rendered a moot point if NYT simply adds three-times as many digital customers as there are remaining print customers, and the company is expected to be at least halfway to doing just that within the next few years, pushing past the 4 million digital subscriber count. For its part, NYT has pitched 10 million digital subscribers as a realistic long-term goal, which would mean adding another 7.13 million digital subscribers, or greater than 8x the number of current print subscribers.

Will New York Times Co (NYSE:NYT) Be Able to Retain Digital Subs?: MTHD also questioned whether the bulk of new subscribers added during the first-quarter of 2017, when digital subs shot up by 60% year-over-year, would remain in the fold once their one-year introductory rates had expired. However, NYT’s first-quarter results alleviated any concerns on that front, as CEO Mark Thompson stated that retention of the post-election subscribers remained strong more than a year into their subscriptions, allowing overall digital subs to climb by another 139,000.

And as a greater percentage of the overall subs get locked in at the higher annual subscription rate over the coming quarters, MTHD’s revenue per customer estimates on the digital side need to be moved higher. That figure should push $300 per customer by the end of 2018, a 15% increase, and further lowering the subscriber growth rate necessary to offset print.

Hedge Fund Ownership of New York Times Co (NYSE:NYT): At Insider Monkey, we track the stock picks of over 600 of the most successful hedge funds in the world to uncover actionable patterns and profit from them (free samples of our premium newsletters are available).

In the case of New York Times Co (NYSE:NYT), 19 hedge funds in our database were long the stock at the end of 2017, owning 16.4% of its float. The biggest NYT bull is Anand Desai of Darsana Capital Partners, which owned 15 million shares at the end of March, making it the second-most valuable position in the fund’s 13F portfolio. In the first-quarter, Daniel Och’s OZ Management (4.17 million shares) and David Greenspan’s Slate Path Capital (3.55 million shares) each opened long positions in the stock.

Is New York Times Co (NYSE:NYT) A Good Investment?: Print is declining and will continue to decline and New York Times is fully aware of that. The company is fully embracing digital and preparing for an inevitable future where it no longer publishes physical copies at all, or needs to. Sustained digital growth should more than offset print’s declines until that day comes.

While we don’t view New York Times Co (NYSE:NYT) as a good short candidate, its strong run-up has left it fairly valued, with little near-term upside, as we don’t anticipate any big positive surprises on the subscriber front in coming quarters. This looks like a stock to buy into during a pullback and then hold until at least the next election.

Disclosure: None