While many print media titles have been abandoned in the dustbin of history, New York Times (NYT -0.25%) showed many signs of life, with an 80% return over five years. It can be hard to teach an old dog new tricks, but this iconic 170-year-old New York newspaper has done a great job of reinventing itself as a modernized digital media platform and is a solid success story. in the area. However, a prominent activist investor believes there could be more upside ahead and the company could do even more to unlock additional shareholder value.
Enter the activist
ValueAct Capital Management, a prominent activist investor with over $6 billion in assets under management, recently opened a position in The New York Times with a stake worth over $86 million during the second quarter . ValueActs now owns approximately 6.7% of the company’s shares.
ValueAct was founded in 2000 and has been involved in many successful activist investments over the years. ValueAct is perhaps best known for its investment in Microsoft in 2013, which some consider a key reason former CEO Steve Ballmer left the company. Activists sometimes like to rock the boat by pushing for big change and jostling management teams, but that doesn’t seem to be the case here. ValueAct says it believes the stocks are undervalued and represent an attractive investment opportunity.
While ValueAct wants to discuss everything from board composition to dividend policy, it seems the main strategic initiative in its mind is leaning more towards subscription-only products. Apart from the company’s flagship newspaper and site, The New York Times, the company also owns a high-end sports website, The Athletic, which it acquired for $550 million in January, as well as popular platforms crosswords and cooking. In January, The New York Times also acquired 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 package and would pay a steep premium for it, but don’t even know the offer exists. This is an opportunity that We believe management needs to drive urgently, as it is the greatest lever to accelerate growth, deepen the NYT’s competitive moat, and ensure the platform’s long-term strength and stability.”
Creation of a ditch
ValueAct argues that by bundling content into a subscription package and pushing that package more aggressively, The New York Times can increase double-digit revenue while tripling margins. Investment managers love subscriptions because they’re a predictable, recurring source of revenue. ValueAct believes that the strength and depth of the company’s brand and platforms gives it a competitive advantage and creates a divide around the company at a time when the way people consume media is changing. ValueAct posits that individuals want to consume content on a range of high-quality and trusted websites, mobile apps, social networks, and more, and believes that The New York Times’ reputable image and collection of prestige platforms give it an advantage. “While most of its fragmented competitors are challenged for growth, NYT is building a bigger, more profitable and more defensible business.”
Can ValueAct unlock more potential?
It looks like ValueAct has a lot of good ideas, and if The New York Times can optimize how it sells its digital subscription packages to drive significant revenue and margin growth, this investment could be a home run. That being said, New York Times shares are by no means cheap at 29 times earnings. Other newspaper titles like Lee Enterprises and Daily Newspaper Society trade at 11 and 18 times earnings, respectively, so it’s not exactly a handy fruit. But given that The New York Times is a media powerhouse along with other brands like The Athletic and the other aforementioned properties, one could argue that it deserves a higher valuation.
I think there is some risk here, as the stock is already at a higher valuation, leaving little safety margin, and it remains to be seen whether ValueAct’s plan will be implemented successfully, or whether it will be implemented by the company. It seems CEO Meredith Kopit Levien is on the same page as ValueAct – during the company’s second quarter earnings call, she said the package was an important way for the company to maintain a growing subscriber base engaged as interest in news ebbs and streams, and said that during the second quarter, the company brought in new subscribers to the package since the start of a quarter. The company will also offer The Athletic as part of an overall package later this year.
The New York Times has reached 10 million subscribers and aims to grow to 15 million by 2027. Suppose the company can achieve this massive subscriber growth and successfully implement ValueAct’s strategy to increase margins and revenues. In this case, New York Times shares could be an attractive investment in the future.
Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has posts and recommends The New York Times. The Motley Fool has a disclosure policy.