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Up 70% in the Past Year, Does The New York Times Still Have Room to Run?

By Asit Sharma - Oct 26, 2017 at 8:12PM

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It may be "old media", but the famous newspaper is flourishing under the current presidential administration.

Blue Apron (APRN 12.64%) made its debut on Wall Street just a few months ago, but the stock is already down 50% from its original offer price.

In this episode of Industry Focus: Consumer Goods, Vincent Shen and Asit Sharma look at the ongoing headwinds Blue Apron must overcome, and how the meal kit industry is likely to become even more challenging.

The cast also spends time looking at The New York Times Co. (NYT 2.51%), which is enjoying a major boost in readership thanks to President Trump. But while this impressive growth may be temporary -- the stock is up about 80% since election night -- the company has been working for years to transitions its business to a sustainable, digital platform.

A full transcript follows the video.

This video was recorded on Oct. 24, 2017.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Tuesday, October 24, and I'm your host, Vincent Shen. We're getting back into the usual swing of things after last week's Pitch a Stock theme. If you missed any of the episodes or want the consolidated list of the 15 stocks that were pitched by our contributors, shoot an email to and we'll get that list over to you straight away. One more plug, we're always happy to field questions and take show ideas from Fools, so you can also use that email,, to pitch us ideas or ask us questions. We're always happy to hear from listeners.

Today, we'll be talking about old media and turning our attention to one of the most famous names out there in the news, The New York Times. But before we dive in, we'll also talk about some of the latest developments at Blue Apron, and we'll also preview the upcoming IPO from one of its meal kit rivals, HelloFresh. Joining me for this discussion via Skype is senior contributor, Asit Sharma. Welcome, Asit! Great to have you with us, as always.

Asit Sharma: Vince, hola! Listeners, what's up, Fools?

Shen: [laughs] I mentioned this to you before the show, but I wanted to quickly get your thoughts, maybe just spend a couple of minutes talking about the latest news with Amazon's HQ2. The application process is finally over. This is for the company's second headquarters. They said they received applications from 238 cities and regions applying to be the home of Amazon's second headquarters, and that represents a total of 54 states, provinces, districts, and territories in North America. The big draw, of course, being the more than $5 billion the company will invest in development of its second headquarters, and the 50,000 high paying jobs that will go along with it. Do you happen to know, Asit, if your region near the Research Triangle submitted a bid, and if they put out any social media stuff around that?

Sharma: I'm pretty sure they did, Vince. I was following it on Twitter, and the Raleigh area certainly put in a bid, I think Charlotte did, as well. Some of our listeners may have seen on TechCrunch or a couple of other sites, there are some nice videos that prominent cities have posted, from Philadelphia to Atlanta, you can watch their presentations. Boston, in particular, I thought had a great presentation. But how about up there in the northern Virginia area?

Shen: Absolutely. I was at a wedding this last weekend, and Amazon's HQ2 came up a few times in conversation. A lot of us live in the D.C. Metro region, and D.C. mayor Muriel Bowser named specific neighborhoods in her proposal for the city. But we were ultimately a little bit skeptical about such a big development in the District itself. But between D.C., Northern Virginia, like you mentioned, Maryland, there's definitely a lot of options that meet the criteria that Amazon set.

If you're not as familiar with the process and the requirements that Amazon laid out, they mentioned things like proximity to an international airport and universities, public transportation, space for several million square feet of development. At this point, with over 200 locations throwing their hat in the ring, it's going to be tough for us to narrow down the list, though plenty of places have named their top 10 or 20 most likely notable candidates. I'd also like to point out, I think I saw this in the Wall Street Journal or The New York Times, they pointed out a map that's color-coded on Amazon's website regarding the second headquarters, and it seems to indicate at least what states did not submit a bid, which I thought would be interesting to point out. They included Vermont, Arkansas, North and South Dakota, Montana, Wyoming and Hawaii as regions that did not submit a bid for this. I can't say I'm too surprised.

There's also been some controversy around this entire project, since some cities are offering pretty generous incentives to the company to sweeten their proposals, essentially. Though the company will not announce its decision until sometime next year, there isn't too much detail in terms of the announcement timeline. New Jersey, for example, could offer up to $7 billion in tax breaks to the company if they choose Newark, and that would put the headquarters right outside New York City. So that'll definitely be something we'll follow and update on once they've made a decision. 

But, let's get to our main first topic for today, and that has to do with Blue Apron. This is our first update on the company since we talked about them in the summer when they had yet to actually price their IPO. They were getting geared up for the IPO process. At the time, Asit, you and I we're actually pretty bearish on the company when we discussed it then. Its IPO ended up starting with a price range of about $15 to $17 per share, which gave the company a valuation of about $3 billion. But they had insufficient demand during that whole roadshow process for their IPO. They had to lower their range to between $10 and $11, they priced at the bottom of that. So $10 per share, they had a $1.9 billion valuation that they started with, but they've been on a pretty consistent downward slide. Their shares are now at $5. The latest development for the company was the announcement of layoffs -- 6% of its workforce, about 300 people. Back in July, there was an internal management reorganization as well, with the co-founder and COO stepping down, new positions being established. Are you any more or less bearish since the last time we talked about this company?

Sharma: First, I want to say that I went back and looked at the transcript of our conversation. We were careful to put in positives and what we called red flags. So if Blue Apron had done really well, today we'd be saying, "Yeah, we knew it was going to do well, but we did put in these caution notes for investors." Actually, we were sort of negative on the company. I think what really leaps out at me is the problems we had identified before the company went public, one of those was negative working capital. That means the efficiency of assets on hand to pay current obligations. And that followed Blue Apron through this IPO process. They went public on the 5th of July and received a cash infusion. It was only $278 million, the entire IPO raise. As you point out, Vince, much smaller than their initial ambitions. And I wanted to read a couple of figures from the reporting they've done since then. They have issued a quarterly report. Again, this was before the IPO. But in the first six months of this year, the company has generated $483 million in revenue, it's had an $84 million loss, and it's had a cash burn of $71 million. Last quarter, second quarter of this year, revenue rose 18%. But that's a slower pace than even the quarter before that, which showed 42% year over year of growth.

One of the things we talked about, and Vince, you really dived into, was the problem that Blue Apron has with its customers, that it spends a lot to try to keep its customers, a lot of marketing on that, and it seems to churn through its customer base very quickly. I was curious after that conversation, what are your thoughts on Blue Apron vis-à-vis how it has to spend all this money for customers, and it always seems to be treading water just to keep an active customer subscription base.

Shen: My concern, and I went through their second quarter earnings call, and you could tell that management was under a lot of pressure. They ran into operational issues, they were very cagey about certain key metrics and numbers that they've alluded to as important but didn't really want to share the actual numbers themselves. There was certainly a case of bad timing as well in terms of the Amazon-Whole Foods deal being announced right around the time of their IPO, which I think made a lot of investors jittery about how they would compete against such a bigger player and somebody who's so good at disrupting various industries. One issue that they mentioned over and over and over again during that earnings call as having been a headwind for them, something that really hurt their momentum and hobbled them in the back half of the year, was this new Linden facility that they've spent millions of dollars developing. At the time, for the second quarter, it made up just a small, single-digit percentage of their national meal kit volume. And that's after some delays, after some cost increases. 

So eventually, I think there's a point during the conference call, at that time, it was in early August, they were hitting about 20% to 25% volume at the facility, and management was very hopeful about reaching scale at Linden at increasing that utilization for that investment, ultimately with a long-term goal for Linden to make up over 50% of their volume. The thing is, in that time, with the challenges they've encountered at the facility, they're talking about how it's going to hurt their margins going forward, at least temporarily, and that's on the path, of course, long-term, to Linden having tons of automation and ultimately being their most efficient facility. But when it comes down to it, they mentioned how those challenges are tied into challenges in terms of their fulfillment process with this metric they called OTIF -- on time in full. Basically, it's a measure of customers getting their complete and correct orders on time, and how a worsening OTIF also impacts their customer retention. For new customers with not a pleasant experience in terms of their first meal kit deliveries, they're maybe not as loyal, decreasing that lifetime customer value and that average revenue per customer. And then, that gets a double whammy, because management also spoke significantly to how they're trying to decrease their marketing spend. 

In that prior episode, in that primer, in terms of this Blue Apron business, one of the things we talked about, and I think you mentioned this not long ago, was the amount of money they have to spend to acquire customers, and whether or not that investment in each new account is really sustainable. But the company is trying to address these challenges and make its service more sticky and attractive by expanding some of its offering lineup with fast prep meals, it's trying to offer more dietary options, more day parts specific menu items. These are all things they're considering. I'd say, taken together, it was a very rough launch out of the gate for them considering the challenges they saw during the IPO process itself. It didn't inspire a lot of confidence in investors, and it certainly explains the negative trading that they've seen so far.

Sharma: Yeah. I go back to this idea of attracting customers. If you look at the facility in Linden, it's supposed to be a fully automated facility at some point in time and really save on margin for Blue Apron. But this is a classic top line, bottom line squeeze. Right now, the company doesn't have cash to both invest in this facility and increase marketing, which it desperately needs to gain that market share and fend off competition. In the last quarter, the company reduced its marketing by $26 million, and as a result of that, its customer base declined 9% to 943,000 customers. So the customer base went under a million, because they had to pull back on marketing. But at the same time, without this automation fully in place, it won't achieve the margins that's supposed to generate more cash to then go out and get more customers. So the company is going to have to, at some point, either do a follow-up offering and try to go to the market again, which, there's no appetite for those types of shares yet for a secondary offering. Or it could increase its debt load to pump money into marketing, finish its fulfillment center, and try to compete with the likes of Plated, which was a competitor that was independent also but was recently acquired by Albertson's for about $200 million.

Shen: Yeah. What it comes down to is, you can see management is trying to juggle all these different pieces here. They have this Linden roll out, and trying to make sure that they avoid any more hiccups there. Then, they have to balance their marketing spend, which you mentioned in terms of their cash flow, the squeeze in the top and bottom lines. They have new competition coming in, and what that might look like with a Plated acquisition, for example. But then, to make matters even more interesting, you have HelloFresh, one of their biggest rivals, gearing up for its own IPO in Germany. If they price where they want to, that will ultimately be a bigger deal than Blue Apron had, and they'll come out of the gates potentially with a stronger valuation than Blue Apron as well. Currently, Blue Apron has a market cap of about $1 billion, whereas HelloFresh would like to come out with a valuation, I think it was €1.8 billion. Did I get that right, Asit?

Sharma: About €1.5 billion, or $1.8 billion.

Shen: Thank you -- so higher valuation. The CEO of HelloFresh, Dominik Richter, he said that his company is poised to surpass Blue Apron by revenue in the coming months. Management has established a very clear goal of becoming the No. 1 meal kit player in the United States by next year. What other details have you seen around them, and what kind of impact do you think this is going to have for Blue Apron?

Sharma: The detail that really stuck out to me, Vince, was if you line up the second quarters between these two companies, HelloFresh had sales -- and I'll convert this to dollars -- $169 million vs. $238 million for Blue Apron. Which is why HelloFresh says it can overtake Blue Apron this year. Now, let's do some math. Blue Apron, as I mentioned earlier, did a little less than $500 million of revenue in the first six months of this year. So, if both companies are at a run rate of about $500 million in half a year's time, that's $1 billion revenue, roughly. Let's fast forward to next year. That's $2 billion of revenue in a year. Now, most of the estimates that I have seen for the meal kit delivery market in North America in total are about $2 billion. These are two companies -- small, fledgling, raising money in the public markets to go against the likes of Amazon-Whole Foods with AmazonFresh, and we know Amazon has taken out some trademarks and patents for its own delivery service. We mentioned Plated, which is now owned by deep-pocketed grocery chain Albertson's. Not to mention Kroger, which also has its own small meal kit delivery service that it's working on. If the whole market for meal kit delivery is $2 billion, and these two companies will have most of that market by some point next year, guess what? They're extremely vulnerable to me.

Shen: Yeah. They might be the biggest players right now, but I think you have to look at the growth overall for this industry. Overall, I'm not all that bullish on the meal kit space in general. I think competition ultimately is going to drive prices down, shake out some of the weaker players. But it's a growing industry. Blue Apron, despite the challenges that it's seen, some of the analyst expectations for the company's revenue, they expect it to grow double digits in the next several years, hitting close to $1.2 billion by 2018. But, on the HelloFresh side, I think they have more active customers than Blue Apron. Management has also indicated that they hope to break even in the next 15 months. So neither company right now is operating profitably, but if they can do that, it definitely helps to legitimize and add some weight to the idea of these being more sustainable businesses. But then, you have the issue in terms of, who owns Whole Foods? With Amazon potentially having taken over that business and deciding to throw its hat into the ring here with the help of the brick-and-mortar infrastructure that Whole Foods includes, the scale and size advantage that they have, and Amazon's logistical prowess, I feel like every single time we talk about some industry on the verge of disruption Amazon has something to do with it and how they can hurt the established players. This is also a case where that's definitely a potential thing. Is there anything else that you think investors need to be following for Blue Apron in the coming months? Key objective from management that I've seen, they've laid it out, they say they want to increase lifetime values of their customers and their revenue per customer, but we haven't gotten as much detail on those lifetime values. Revenue per customer and orders per customer, those metrics, if you look at the latest release, are moving in the wrong direction. So I will definitely be watching for that when they report in early November. So just a little over a week from now. What else are you watching, Asit?

Sharma: Really quick, investors, you'll see this Q3 report that Vince mentioned, and take a look at the balance sheet, because that will have the proceeds of the IPO and how the company has used that cash already. And take a look at the cash flow statement of the operating cash flows, and take a look at what that cash burn looks like. Very important, because, as we said before, the company needs to both invest in its facilities and invest in marketing. We'd like to see the customer numbers improve, as Vince mentioned, but also, how bad does that balance sheet look? And we'll get a really good chance to see that next week, and we'll have some coverage on So you can read one of our articles and get the lowdown.

Shen: Alright, Asit, our last topic here, we're running a little short on time, so we'll try to keep this part of the discussion quick. I wanted to focus a little bit on the New York Times. We don't talk about them enough on this show here. It's an interesting company that's put up really strong results in the past few quarters. Coincidentally enough, benefited a lot from a somewhat antagonistic relationship with President Trump. Exactly how well has this company been doing under this administration?

Sharma: In the last quarter, digital-only subscription editions for The New York Times jumped 69% year over year. The Times now has over 2 million digital subscribers, and that's doubled in a short two-year period. So, the answer is, Vince, they're doing extremely well under the Trump administration. Investors, let's go back to high school. This term symbiosis, do you remember this, when two organisms have a mutually beneficial relationship? It's exactly what we see here. I like to think of this as a "frenemy" relationship. It's not a coincidence, The New York Times will report earnings next week on November 1, and that's just a few days shy of the one-year anniversary of President Trump's election, the stock is up almost 77% from the day of the election to today. President Trump likes to bash the failing New York Times, but under him, they've been more sailing than failing. President Trump is a native New Yorker, he reads the Times, and he grants exclusive interviews to the Times. There was one in July with New York Times reporter Peter Baker, Michael Schmidt, and of course, Maggie Haberman. The President sees the value of keeping The New York Times as a mouthpiece, as much as he loves to bash them. And you won't hear the editors or business managers of the Times complaining about the revenue that the company is getting from this relationship.

Shen: Yeah. If you look at this business and how they've had to adjust, obviously the print side of their business has definitely shrunk, and they're losing subscribers there, advertising money is flowing out of the print side. It makes sense that they've not only invested significantly in their digital platform but seen quite a bit of success from it. This near-term boost, I feel like, they can really do a lot to take advantage of the amount of increased subscribers and attention that they're getting now and in the past year as a result of some of these headlines.

But understanding and seeing the long-term outlook for its print business, and how that wasn't sustainable, I think they made the shift a little over five years ago. With over three million total subscribers now, the double-digit growth that you mentioned in the past year thanks to that digital side of the business, and that's with both their subscriptions and their advertising revenue. But I think about the print side, and despite the fact that's shrinking in terms of its contribution to The New York Times, the subscriptions fall off slightly with each passing years, advertisers leave even more quickly, but it reminds me a little bit of tobacco companies. Even though these tobacco companies are losing smokers each year in developed countries, they can raise prices enough to offset the loss, if not even grow revenue a little bit. The same thing seems to apply for their print subscribership. It shrinks a little bit each year, but they can raise those prices and keep it almost flat. At the same time, on the flip side with their digital subscribers, see that incredible growth.

There's a quote from management earlier this year during an earnings call, they said, "We believe that the fundamental story from 2015 onwards is a better understanding and better execution of the pay model and opportunity to accelerate. And I think, when I look at the next few years, we're certainly not saying that we expect the short-term effects of Donald Trump's election as president and the associated news cycle necessarily to last at its current rate forever." The idea behind this, and what I like about it is, if the next three years with this administration continue to provide a tailwind to the company due to greater demand for news coverage, in terms of this administration, despite the fact that this heightened level of interest won't last forever, management acknowledges that, the company has some time to essentially turn these new digital subscribers who are interested right now, because of Trump coverage, for example, they have the opportunity to turn them into loyal readers, either through the habit of reading The New York Times each day, or by increasing the amount of content they offer and increasing their value proposition.

They're releasing more video content, they're releasing podcasts, they're getting into product reviews, and expanding the amount of content they offer that way, potentially, again, winning over the subscribers that they're getting now in that way. All in that backdrop, too, they also can continue to improve and optimize their advertising business. So it's just interesting, and I think it'll be interesting to watch how this company takes advantage of this heightened level of interest they're enjoying right now. What else are you watching or looking forward to to see the company try to take advantage of in the coming years, and that you think potential investors need to know?

Sharma: One thing that I'm really watching in The New York Times is the way that they're taking hold of their brand. Much in the way we talked about Tiffany's a few weeks ago, it's a very well-respected brand. The Time's ability to parlay that into additional revenue is going to be crucial. They were doing this well before the election. This was one of my very first CAPS calls when I joined the Fool back in late 2012. Listeners, if you haven't played CAPS, you have to, it will teach you how to invest.

The strategy that they laid out really appealed to me five years ago. And as you said, the Trump administration has just given them a tailwind for initiatives they were already working on. So things like digital crosswords, the Times last quarter saw their digital crossword subscription increase 42%. Now, that's only $3.2 million, but that's 4% of total digital-only revenue in the last quarter. So these really small revenue streams that ride on The New York Times' brand, which it's focused on, as you mentioned, the content, the podcast, those are going to be extremely important over the years. It's an interplay of the very particular in these initiatives and this big picture of this respected name that's really pushing change so it doesn't become one of those has-been companies. There are a number of those tobacco companies that aren't around any longer, Vince, you'll note. A few innovative ones have survived. But keep your eye on that big picture for the Times. Right now, it still has a forward P/E of close to 28x. It's gotten a little pricey with the price run-up, but it's still a great long-term investment, in my opinion.

Shen: Yeah. Makes sense, given the almost 80% price appreciation the stock's seen, as you said, in approximately the last year. Again, investors, you want to see this company take advantage of the extra attention and goodwill they have right now that they're likely to have in the next few years and try and lock that down and turn that into long-term subscribers and an improved advertising business model. Thanks again, Asit, for joining the show.

That's all the time we have today. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell stocks based solely on what you hear during the program. Fool on!

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