While many print media stocks have been resigned to the dustbin of history, the New York Times (NYT 0.71%) has shown plenty of signs of life, with a five-year return of 80%. It can be difficult to teach an old dog new tricks, but this 170-year-old, iconic New York City newspaper has done a great job of reinventing itself as a modernized digital media platform and is a strong success story in the sector. However, a prominent activist investor believes that there could be more upside ahead and that the company could do even more to unlock additional value for shareholders.
Enter the activist
ValueAct Capital Management, a prominent activist investor with over $6 billion in assets under management, recently initiated a position in New York Times with a stake worth over $86 million during the second quarter. ValueActs now owns about 6.7% of the company's shares.
ValueAct was founded in 2000 and has taken part in many successful activist investments over the years. ValueAct is perhaps best known for its investment in Microsoft in 2013, which some see as one of the key reasons that former CEO Steve Ballmer left the company. Activists sometimes like to rock the boat by advocating for big changes and shaking up management teams, but that doesn't seem to be the case here. ValueAct says it believes shares are undervalued, and that they represent a compelling investment opportunity.
While ValueAct wants to discuss everything from board composition to dividend policy, it seems that the main strategic initiative on its mind is leaning more heavily into subscription-only products. Outside of the company's flagship New York Times newspaper and site, the company also owns a premium sports website, The Athletic, which it acquired for $550 million in January, as well as popular crossword puzzle and cooking platforms. In January, the New York Times also acquired the popular word puzzle game Wordle. ValueAct's bone of contention is that "our research suggests that most current readers and subscribers are interested in the bundle and would pay a large premium for it but are not aware the offering even exists. This is an opportunity we believe management needs to drive with urgency, as it is the biggest lever to accelerate growth, deepen NYT's competitive moat, and ensure the long-term strength and stability of the platform."
Creating a moat
ValueAct contends that by grouping content into a subscription bundle and pushing this package more aggressively, New York Times can grow revenue by double digits while tripling margins. Investment managers love subscriptions because they are a source of predictable and recurring revenue. ValueAct believes that the strength and depth of the company's brand and platforms gives it a competitive advantage and builds a moat around the company at a time when the way individuals consume media is changing. ValueAct posits that individuals want to consume content across a range of high-quality and trusted websites, mobile apps, social channels, and more, and believes that the New York Times' reputable image and collection of prestige platforms gives it an edge. "While most of its fragmented competition is challenged for growth, NYT is building a bigger, more profitable, and more defensible business."
Can ValueAct unleash more upside?
It seems like ValueAct has a lot of good ideas, and if the New York Times can optimize the way it sells its digital subscription bundles to drive significant revenue and margin growth, this investment could be a home run. That being said, shares of New York Times are by no means cheap at 29 times earnings. Other newspaper stocks like Lee Enterprises and Daily Journal Corporation trade at 11 and 18 times earnings, respectively, so this isn't exactly low-hanging fruit. But given that the New York Times is a media powerhouse with other brands like The Athletic and the other aforementioned properties, one could make the case that it is deserving of a more premium valuation.
I believe there is some risk here, as the stock already has a premium valuation, leaving little margin of safety, and it is yet to be seen if ValueAct's plan will be implemented successfully, or if it will be implemented by the company at all. It does seem like CEO Meredith Kopit Levien is on the same page as ValueAct -- on the company's second-quarter earnings call, she spoke of the bundle being an important way for the company to keep a growing subscriber base engaged as interest in news ebbs and flows, and said that during the second quarter the company brought in the newest bundle subscribers in a quarter to date. The company will also push The Athletic as part of an overall package later this year.
The New York Times hit 10 million subscribers and has a goal of growing to 15 million by 2027. Suppose the company can achieve this massive subscriber growth and successfully implement ValueAct's strategy to increase margins and revenue. In that case, shares of New York Times could be a compelling investment going forward.