With investor attention usually fixated on the largest companies, it's no surprise that an $8.1 billion mid-cap stock flies under the radar. But The New York Times (NYT 0.21%) has generated some serious returns as the stock soared 292% over the past five years. This kind of performance shouldn't go unnoticed.
Don't think that the party is over, though. This legendary news organization is still in the early stages of transforming itself from a print and advertising business to one driven by digital subscriptions, which could propel the stock even higher over time.
Here's why I think The New York Times deserves much more chatter among the investing community.
2020 was a record year
The New York Times added 2.3 million net new digital-only subscriptions last year, bringing its total subscriber base to 7.5 million. While the company has other subscription offerings around cooking and games (formerly crosswords), its core news product has amassed 5.1 million digital subscribers. These sorts of figures demonstrate a consumer willingness to pay for high-quality journalism.
The business definitely received a boost in 2020 from what was an eventful year headlined by a global pandemic and a historic presidential election, but don't think the company's success is short-lived. In 2015, The New York Times celebrated reaching one million digital-only customers, so growth has been steady over the past several years.
Now, management believes the total addressable market it's serving is the 100 million people worldwide who pay for digital news in English. When speaking about the company's current customer base on the most recent earnings call, president and CEO Meredith Kopit Levien said, "No reason we can't have two, three, four times that over time, maybe even more."
It's quite impressive to see such a historic organization that was built on print newspapers and advertising revenue completely upend itself in order to be better positioned for long-term success. It requires a strategic shift with investments in technology and other new initiatives that may not be welcomed by investors. But a subscription model allows the business to put readers first, which will ultimately benefit shareholders over time.
Greater profits are coming
Now that The New York Times is a subscription and digital-first company, it is ready to start generating more profits. Its old model of printing and shipping physical newspapers meant high variable costs, the opposite of what is true today. With digital subscription revenue now the largest piece of the top line for the company, The New York Times employs a fixed-cost structure. This means it basically costs nothing for the business to service each additional customer, making its business highly scalable.
Overall sales have been flat over the past few years as revenue from print was offset by digital. Now that digital is the biggest contributor, the true earnings potential of the business will be on full display. And once a certain break-even point is reached, margins and net income will skyrocket. This sort of scalability is only possible, because the company made the transition to a digital-first organization. Think of a software company that spends huge amounts to develop the product, but once it's ready for customers, it's very high-margin.
Levien explained on the fourth-quarter earnings call that as subscriber count grows, long-term profitability will follow:
[W]ith every passing quarter, there is also more in our control, from an improving understanding of consumers to pricing power to more disciplined management of cost in our legacy business. And as our command of [these] levers improves, so too should our profitability. As we continue to make progress in these areas, we aim to see modest profitability improvements in 2021 with more improvement to come in the years that follow.
Investors should be talking about this powerful news organization more than they are. It's been a winning stock for years, and it's ready to continue this performance going forward.