Greenhaven Road Capital, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A spectacular net return of 105% was recorded by the fund for the year end 2020, outperforming its Russell 2000 benchmark that returned 9.4%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Greenhaven Road Capital, in their Q4 2020 Investor Letter said that they acquired a new position in The New York Times Company (NYSE: NYT) as part of their significant Q4 2020 stock acquisitions. The New York Times is a daily newspaper company that currently has an $8.1 billion market cap. For the past 3 months, NYT delivered a 20.61% return and settled at $49.59 per share at the closing of January 29th.
Here is what Greenhaven Road Capital has to say about The New York Times Company in their investor letter:
“The second significant investment that we made during the quarter was in The New York Times (NYT). The newspaper business is very challenged; in fact, industry wide revenues are hovering somewhere around the 1980s’ level and circulation sits at multi-decade lows. The NYT’s revenue rose by 14% from 2015 to 2019 (last full years available). No, that is not 14% per year, but rather 14% total over those five years. For many years, digital advertising was to be the savior of media companies, but this has not proven to be the hoped-for panacea as Google and Facebook have taken content from publishers under very depressed economics and digital ad rates have declined. The New York Times’ print subscriptions are down more than 50% from their peak and will likely trend to zero in the next decade.
While the top line quantitative data is underwhelming, the business is transitioning away from an advertising-supported to a subscription-supported model. In 2000, The New York Times’ revenue was made up of approximately 25% subscription and 75% advertising/other. Today those numbers are flipped, with approximately 75% of revenue earned from subscriptions.
The transition to a subscription-based business has been a gradual one for which The New York Times was ill-prepared. In 2011, the Times instituted a paywall to limit individuals’ monthly readership in order to drive heavy online consumers to begin to pay for continued access. In the decade since, they have gone through an iterative process of enhancing the marketing team, improving the technology, and experimenting with pricing tiers, products, and offerings. A subscription focused business requires different skills than an ad-supported organization. The latter is focused primarily on traffic, while the former is much more focused on customer acquisition costs, retention rates, and lifetime value of subscribers.
Subscribers are grouped into cohorts and segmented by areas of interest, frequency of consumption, type of content consumed, and breadth of content consumed. Over time, the tracking and marketing has gotten more sophisticated – figuring out better ways to nudge registered users to become subscribers and getting existing subscribers to renew. A registered user who only reads political articles may be sent targeted emails highlighting other types of content since people who come to the site for two or more content areas subscribe at much higher rates. Other tactics include varying introductory pricing by user type and adjusting renewal rates based on each individual user’s data profile. These changes have required the Times to improve technology and personnel at all levels of the company, including the board of directors, which is surprisingly tech savvy.
The New York Times actually gets better as it gets larger. There is a flywheel in effect: quality content drives subscriptions, which provide more resources for better content, which drives additional subscribers, which provides again more resources for content. The New York Times pays starting reporters two to three times the industry average, and, given they have four times the number of subscribers as their next-largest peer, they can hire the best talent. Recently, they have hired notable journalists Ezra Klein, Ben Smith, and Kara Swisher from small upstart competitors. The strong have gotten stronger. With their scale, they can provide more and better coverage on international events and other special topics, helping to attract more subscribers. Scale also allows them to devote quality resources to complicated, drawn-out research on issues such as Donald Trump’s taxes, and fosters access to “exclusive” stories because they can provide reach, which drives subscribers, which provides resources.
The New York Times has also benefited from consumers’ increasing willingness to pay for content. While hidden under the decline in print revenues and digital ad revenues, The New York Times has built the world’s largest subscription news business with 25%+ growth per year over the past five years. Their financials are starting to reach an inflection point where the growth in digital subscribers is larger than the print and digital ad declines, allowing the profitability of the subscription model to become more evident as fixed costs are spread across a larger customer base with effectively zero incremental costs for distribution. As a result, The New York Times should be able to continue building their news organization and still benefit from operating leverage as their revenue should grow far faster than their fixed costs from this point forward.
The future for the Times is interesting, in part, because the competitive landscape is so challenged. Humans have a natural desire to know and understand what is going on in the world. To push the fight club metaphor to its breaking point, in 2000 The New York Times was a disoriented, over-privileged child giving product away to Google and Facebook in pursuit of digital revenue dreams. Through a lot of hard work, strategic personnel changes, and a paywall, the organization built a sustainable subscription business. The New York Timesis now one of a very small group of trusted national and international news providers. For digital news subscriptions, their primary competitor is a bundle, and given consumers propensity for multiple subscriptions, it is highly likely that The New York Times will be one of the last papers standing.
The digital platform of The New York Times provides optionality, with opportunities to offer additional products and services to an engaged and educated audience. To date, progress includes their flagship podcast, The Daily, which gets four million listens per day. The catalog of old content is being monetized through subscription offerings for both crosswords and recipes – these high margin subscription products have over 1.3M subscribers. The company has also grown its product recommendations hub, Wirecutter, into a standalone website that generates in excess of $50M a year in revenue. There is also a TV show that airs on Hulu. With the brands, traffic, and data generated, NYT is well-positioned to continue building complimentary revenue streams.
Despite being arguably the best-known newspaper in the world, The New York Times is still in the early stages of building its subscription business. In the third quarter of 2020, the company ended with 6M digital subscribers after adding 2M in the last year alone. They have stated a goal of 10M digital subscribers, and I believe they can grow well beyond that. At 12M with an average revenue per user of $200, NYT should generate roughly $3B in revenue and $1B in pre-tax earnings. At a multiple of 20X pre-tax earnings for a growing media business with operating leverage and a lot of optionality, the value of our investment would be more than a double and on its way to a triple. Holding a position in the media ecosystem as the paper of record and a daily visit for tens of millions of educated readers provides several paths to success in a decimated competitive landscape.
Despite being in the storytelling business, The New York Times has no investor presentation and has done a poor job of communicating the transformation of its revenue model and potential of the business. The best public resource is an anonymous blogger by the name of Mine Safety Disclosure. Before you roll your eyes, look at his work. My research was also assisted by William Faulkner, a recent Stanford Business School graduate who is launching a new fund, Aurora Capital.”
NYT delivered a decent 52.10% return in the past 12 months. However, our calculations show that The New York Times Company (NYSE: NYT) does not belong in our list of the 30 most popular stocks among hedge funds.
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