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A Potential 10-Bagger After Warren Buffett's Own Heart

By Neil Patel - Apr 2, 2021 at 7:30AM

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This familiar business could generate some serious returns for investors.

Prior to exiting the industry completelyWarren Buffett had long been a lover of the newspaper business. The conglomerate he runs, Berkshire Hathaway, sold its entire stake in BH Media Group in January 2020. Included in the collection of local newspapers were names such as The Buffalo News and the Richmond Times-Dispatch, among many others. 

His growing pessimism was primarily the result of declining advertising revenue as more people find different ways to consume news online, making these business models outdated. However, there is one big-name news organization that is making great strides at transitioning from a print- and advertising-focused structure to one centered on digital subscriptions. 

The New York Times (NYT 1.71%) is a company still early in its turnaround journey. Besides being a business that Warren Buffett would love, the stock has the makings of a potential 10-bagger. Here's why it should have the attention of other long-term investors as well.

Warren Buffett

Image source: The Motley Fool.

Pay for the news 

There are certainly ways to read the news for free, but The New York Times' 7.5 million total subscribers prove that consumers are willing to pay for access to high-quality journalism. 

In 2020 alone, the business received 23 Emmy nominations. And since the award started in 1917, The New York Times has been awarded a remarkable 130 Pulitzer Prizes and citations, which is more than any other news organization. The Pulitzer Prize, given for outstanding public service in journalism, letters, and music, is the most prestigious award someone in the news business can get. 

Although last year was definitely full of critical events ranging from the coronavirus pandemic to racial injustice to the presidential election, it's worth noting that The New York Times has other popular services not dependent on the state of world affairs. Examples include Cooking and Games (formerly known as Crossword). Along with the flagship news product, all experienced record membership growth in 2020. 

The shift to a subscription model 

Once dependent on advertising sales, The New York Times is changing course. In 2020, the business's largest revenue source was digital subscriptions, the first time this has happened. The company added 2.3 million net new digital-only customers in the year (a 44% increase from the prior year), and sales lost from advertising declines are starting to be more than offset by this valuable recurring revenue stream. 

Tablet with news online sitting on stack of newspapers

Image source: Getty Images.

While total advertising revenue dropped 26.1% in 2020 compared to 2019, digital-only subscription revenue soared 29.9%. This has three very important implications for the company. 

First, The New York Times now has the ability to develop longer-term relationships with its customers. Think of Netflix and Spotify, but for news. The New York Times is in a prime position to build a global, tech-driven news platform. 

Second, not relying on ad dollars benefits everyone. Customers will have a better user experience because the company can cater to them first and foremost. Furthermore, the business won't be exposed to the cyclical nature of corporate advertising spending. 

And third, going all digital means that The New York Times can scale extremely well. It costs money to print and ship daily newspapers. Moving this to the internet essentially results in marginal production costs. So, with more subscribers and a largely fixed cost structure, profits should skyrocket. 

The final word 

Owning newspapers in small towns used to be very lucrative, as we know from following Warren Buffett. But the internet led to the demise of these local monopolies. Ad dollars and consumers shifted online, leaving the opportunity open for a brand-name, digital-first, and subscription-based news organization.  

The New York Times is making huge progress in turning around its business model, and it still has a long way to go. Management estimates that there are a billion people that read digital news and a massive 100 million that would be willing to pay for it in English. This presents a humongous opportunity for a powerful and recognizable brand like The New York Times. 

If 2020 is any guide, subscriber growth is accelerating. Don't be surprised if the Times' current market capitalization of $8.5 billion is a great deal higher in the next few years.

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