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Over the past six months, The New York Times’s shares (currently trading at $49.45) have posted a disappointing 10.4% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is now the time to buy The New York Times, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why you should be careful with NYT and a stock we'd rather own.
Why Do We Think The New York Times Will Underperform?
Founded in 1851, The New York Times (NYSE:NYT) is an American media organization known for its influential newspaper and expansive digital journalism platforms.
1. Weak Growth in Subscribers Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like The New York Times, our preferred volume metric is subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
The New York Times’s subscribers came in at 11.43 million in the latest quarter, and over the last two years, averaged 8.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect The New York Times’s revenue to rise by 6%, close to its 5.8% annualized growth for the past two years. This projection is underwhelming and indicates its newer products and services will not lead to better top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, The New York Times’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
The New York Times doesn’t pass our quality test. After the recent drawdown, the stock trades at 23.6× forward price-to-earnings (or $49.45 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. Let us point you toward one of our all-time favorite software stocks.