New York Times (NYT) Sell Recent price $42 Price target $ 24
The New York Times (NYSE:NYT) has benefited greatly from the increased news consumption during the Trump presidency. Since the start of 2016, the stock is up more than 300% driven purely by multiple expansion (from ~6x to ~21x) on the success of the company’s digital news offering. Subscriptions increased from just over 1 million to almost 4.7 million in 3Q20. However, overall EBITDA has been flat as growth in the digital business has only offset the continued secular headwinds facing the print business.
We believe that a decline in consumer interest in news following the departure of President Trump could result in subscriber declines. Digital subscribers – particularly those who are not on promotional pricing plans – have extremely attractive unit economics and high contribution margin. Losses of these subscribers could have a meaningful impact on EBITDA. We don’t think this is priced in as the consensus estimate currently implies 30% growth in 2021 and valuation is well above historical levels.
Further subscriber declines could come from more than one third of subscribers rolling off promotional pricing plans over 2021. The less sensational political environment may cause fewer conversions as well as fewer new sign ups, adding to declines in subscribers.
All in all, we believe a relatively modest decline in subscribers could drive meaningful negative estimate revision as well as multiple compression. We see the stock potentially trading to $24, down 40% from recent levels.
Potential risks to our call include subscriber additions and promotional subscriber conversion are stronger than we anticipate, the advertising outlook is stronger than anticipated, and print declines moderate.
Dramatic digital subscriber growth in recent years
New York Times (NYT) digital news subscriptions increased from just over 1 million at the end of 2015 to almost 4.7 million in 3Q20. 2020 has been the strongest year to date, with 1.2 million new subscribers through the first nine months, which is higher than the ~600k-700k added per year from 2016 to 2019.
A large portion of the subscriber base is on promotional pricing ($1/ week vs. the $4.25 list price). Management noted on the 3Q20 earnings call that ~1.6 million digital subscriptions – over one-third of the current 4.7 million subscriber base – will come off promotional pricing over the course of 2021.
Attractive unit economics for digital news subscribers
Digital subscribers have very attractive unit economics. On a blended basis (i.e. including promotional and non-promotional subscribers), we estimate the company generated the following in the first nine months of 2020:
Monthly subscription revenue per user of $10.78 Monthly advertising revenue per user of $1.90 (this assumes 50% of digital news product ad revenue is attributable to digital subscribers).
This implies $12.68 of revenue per month. We believe this revenue has a very high contribution margin, probably 70%-80%. While there are some incremental costs associated with a new subscriber – payment processing, platform fees, etc – we believe a large portion of the expenses are fixed or semi fixed.
EBITDA expected to jump in 2021
This attractive financial profile has helped the company offset continued secular declines in the also high margin print business. Between 2015 and 2020, EBITDA has been roughly flat. However, looking out to 2021, the consensus estimate currently calls for EBITDA of $307m, up 30% year-over-year.
Valuation still at elevated levels
While the stock has sold off 14% since its July high, the multiple is still at elevated levels relative to historical levels. It’s currently traded at 21x NTM EBITDA, well ahead of the 18.6x average in 2019 and significantly ahead of the 6.2x 2016 average.
See potential downside to EBITDA and multiple in 2021
With the high contribution margin from full-priced subscribers and the large number of current subscribers rolling off promotional pricing in 2021, we believe there could be meaningful downside to estimates and valuation for the stock over the next 12 months as consumer interest in US politics moderates. We don’t see this priced into the stock given the 30% EBITDA growth expected by consensus in 2021 and elevated valuation.
While it’s difficult to quantify the exact impact of potential subscriber losses, we think the following is a pretty reasonable bear case:
The company loses 307,0000 net full priced subscribers in 2021 on lower consumer interest in the US political environment. This represents 10% of the non-promotional subscriber base as of 3Q20. The company loses 500,000 net promotional subscribers as lower consumer interest in the US political news environment results in few promotional subscribers willing to pay the full price and fewer gross promotional subscribers. This represents one third of the 1.6m subscribers rolling off promotional pricing in 2021. The company cuts $35M in operating expenses. The company added that amount added annually between 2015 and 2020E. The EV/EBITDA multiple contracts to 18.6x – in-line with the 2019 average – as bullishness around the subscriber growth story fades. We conservatively assume that the print headwinds are offset by growth in other digital products.
Under this scenario, we believe we could see a $45mm EBITDA impact. Note, our analysis implies the company posted a net subscriber loss of 835,000 in 2021. Based on the 4.7m subscriber at the end of 3Q20, this would imply 3.8m subscribers, still ahead of where the company began 2020.
Applying our 18.6x target multiple implies a fair value of $24, 40% downside.
Fox Corporation (FOXA) Recent price $29.48 Price Target $23.00
Fox News (FOXA) has benefited from its close ties to President Trump and has seen strong advertising revenue growth over the past four years. However, these tailwinds could be reversing.
It has been widely reported that Trump will look to start a right-leaning news media organization following the end of his presidency. While there are many paths that could take, we think the introduction of an alternative right-leaning news channel with Trump’s support would be a meaningful negative for Fox News. The near-term financial impact would likely be minimal as it would take time to ramp up, however, we would expect pressure onFOXA’s multiple on concerns over the long-term outlook for Fox News.
Furthermore, The company’s cable network advertising – heavily attributable to Fox News – has seen strong growth in recent years in an environment where overall cable network advertising has been challenged. To the extent Fox News viewership moderates in the near term due to lower consumer news engagement, we believe the company could see cable network advertising pressure.
We don’t see these items priced into the stock as it is trading roughly in-line with the post-Disney (NYSE:DIS) sale average and at a premium to peers. We see the launch of a Trump news organization and lower Fox News ad revenues potentially resulting in multiple compression and modest near-term negative estimate revisions, driving the stock to $23, down 28% from recent levels.
Potential risks to our call include Trump not developing a news media project or potentially joining Fox News as a contributor, better underlying advertising trends, and a moderation in industry wide pay TV subscriber declines.
Potential negative trends for Fox News post-Trump:
With President Trump losing the election, we believe the return to a more normal political environment could result in a near-term hit to cable news ratings as the public’s interest in US politics returns to more normal levels. Fox News could see an outsized impact as Trump has increasingly criticized his long-term ally for their less favorable coverage of recent election.
Another potentially negative for Fox News is the potential for Trump to build a conservative-leaning news network that competes with Fox News. Some press reports have suggested Trump will focus on a digital news platform. However, we think this is less likely given the demographics of his supporter base and expect him to focus on a cable TV platform.
We see several ways that Trump could build out a conservative-leaning news operation:
He could partner with an existing conservative learning news organization like One America News Network or Newsmax. Trump could leverage their existing offerings – OAN reaches 23 million households and Newsmax ereaches 58 million – to build out a Trump centered news network. He could partner with Sinclair (NASDAQ:SBGI) and leverage their existing WJLA 24/7 local cable news network, local station portfolio, and existing news assets to build out a national news network. He could start a news organization from scratch, which would likely be very expensive in a secularly challenged industry.
Regardless of the form it takes, this could be a meaningful negative for Fox News.
Fox News a key asset
Fox News is a key asset for FOXA. Fox is made up of two segments, the Cable Network segment – which includes Fox News as well as sports networks FS1 and FS2 and business news network Fox Business – and the Television segment – which includes the Fox Broadcast Network and related TV stations.
FOXA’s cable segment has seen strong growth during the Trump presidency. Between F2016 and F2020, affiliate fees increased 9%, while advertising grew 10%. The advertising growth is notable given that industry cable network advertising was minimal over that period. EBITDA grew 13% per year over that period.
The Cable Segment is the key financial driver of FOXA. While it represents 45% of revenue, it generated ~85% of pre-corporate EBITDA. And Fox News is the key driver of Cable Networks, representing over 60% of total revenue (85-90% of ad revenue and over half of affiliate revenue) by our estimates.
Ratings downturn could impact FOXA EBITDA by HSD
A downturn in ratings at Fox News could have a meaningful impact on FOXA’s financials. If the company were to see a 20% decline in Cable Networks ad revenue, it would represent about one fifth of the growth seen over the past four years and have a 7.2% impact on the 2021 consensus EBITDA estimate.
Stock not pricing in threat from Trump News
We believe a move by Trump into the conservative news media space would be a significant negative for FOXA. It would likely impact Fox News ratings, which would negatively impact advertising and affiliate fee growth.
We’d note we don’t see a significant near-term financial impact from the threat of a Trump-backed news outlet. It would take time for a Trump News network to build out its offering, so the ratings impact would likely be modest in the near term. And affiliate fees are mostly tied to the cable TV bundle meaning customers can’t just cancel FOX News, they have to cancel their pay TV subscription (which is happening, but it’s not that FOX would be disproportionately impacted).
However, we do believe it could negatively impact valuation. This threat does not appear to be priced into the stock. The stock is currently trading at 9.1x NTM EBITDA. This is at the top end of the peer range and roughly in-line with the 9.4x average since the asset sales to Disney in March 2019.
We think these threats could drive meaningful downside for FOXA. We assume a 20% decline in cable network ad revenue on post-Trump declines in ratings. And we assume the multiple contract by 1.5x to 7.6x, which is where it bottomed out early in the COVID-19 sell off. This would point to a $23 fair value for the stock, down 28% from recent levels.
Further downside to FOXA could come around the renewal of the NFL contracts. The NFL TV rights are expiring in 2021 and 2022, with FOXA’s Sunday afternoon NFC rights up for renewal in 2022. Renegotiations appear to be starting and will likely be competitive due to the high demand for sports rights.
Twitter Inc. (TWTR) recent price $ 45.23 Price target $ 34.00
We believe Twitter faces some significant headwinds heading into 2021. The company faces risks on the political front. Not only might usage decline as the intensity of the political environment moderates, the company faces regulatory risk. Both Republicans and Democrats have harshly criticized TWTR for partisan reasons. More broadly, the push to limit the legal protections afforded online platforms seems to have support from both parties.
A competing platform is emerging on the political right, potentially echoing the rise of Fox News in the 1990s. Parler has made a push to attract conservative users with some success, recently reaching 10 million users. While not apples-to-apples, domestic TWTR’s mDAUs in the US are only 36 million. We estimate that losing 1 million subscribers would impact EBITDA by 3%.
Meanwhile, the company saw strong stock performance in 2020 through 3Q earnings driven by strong user growth. This was likely driven by users looking to get up to the minute information about the COVID-19 pandemic. Growth weakened dramatically in 3Q20, suggesting the COVID-19 tailwinds may be fading.
Despite these risks, the stock is still trading at a significant premium to its pre-COVID valuation. We estimate that if the company were to lose 2 million users and the multiple contracted to its 2018/2019 average, the stock could trade to $34, down 24% from recent levels.
Potential risks to our call include a rebound in user growth, better monetization of users as TWTR’s, and a potential acquisition of TWTR.
Political risks on the horizon
TWTR has been facing harsh criticism on both sides of the political aisle. Over the past several years, the company has drawn the ire of many on the right for allegedly silencing conservative voices, most recently by blocking access to an article in the NY Post that was critical of Hunter Biden. Meanwhile, harkening back to the 2016 election, many on the left fault the site for not doing enough to prevent the spread of false information.
More broadly, criticism of tech companies has spread to Washington. At a recent Senate Judiciary Committee hearing TWTR and FB CEOs faced tough questions from both Democrats and Republicans. There was much discussion about the legal protections afforded to online platforms under Section 230 of the Communications Decency Act, which gives online platforms discretion in managing the content on their platforms while shielding the platforms from legal liability. In October, the Department of Justice proposed limiting Section 230 immunity. This is not solely a Republican issue – Joe Biden called to revoke the liability shield earlier this year.
Competition emerging from the right
The alienation of conservatives from social media platforms like Twitter and Facebook (NASDAQ:FB) due to alleged censorship of right-leaning views has resulted in the emergence of Parler, a right-leaning social media platform. Parler was launched in 2018 with a mission to provide a platform centered on free speech. The company appears to be gaining traction, recently passing the 10 million user mark.
To put this in perspective, TWTR had only 36 million mDAUs (monetizable daily active users) in the US in 3Q20. It’s important to note that these aren’t apples-to-apples comparisons – Twitter’s mDAU user base is a subset of its total user base – and Parler’s 10 million users are not exclusive to Parler (i.e., many still likely use Twitter) and it’s questionable how many of those users will convert to being regular users.
However, we do think it shows the scale of TWTR’s conservative user base, which could be at risk of migrating to a more congenial platform. We see the service potentially echoing the 1990’s rise of Fox News as an alternative to the perceived left wing bias of traditional news media.
To get a sense for the potential impact a competing service could have on TWTR, we look at the unit economics of the business. Losing domestic subscribers has an outsized impact on EBITDA. Based on our calculations using 3Q20 results, we estimate that domestic users generated $3.96 in monthly ARPU vs. $0.84 for international users. This revenue is likely very high margin, we estimate at least 90%.
These numbers imply that for every 1 million domestic user loses out of the 36 million mDAU base, TWTR would see a -3.2% impact to EBITDA. If the company lost 3 million users, it would see a roughly 10% EBITDA impact. If it lost 10 million, it would see a 32% impact. Again, we don’t expect all of Parler’s current 10 million users to stop using TWTR, this is just an illustrative example.
COVID-19 tailwinds fading
Prior to 3Q earnings, TWTR’s stock was up 65% year-to-date driven by strong user growth. The company reported a 14m increase in mDAUs in 2Q20 and 20m increase in 3Q20. These were both well ahead of the previous highs of 7m in a quarter (at least since the company began disclosing the metric. The stock sold off meaningfully post-3Q earnings as sequential user growth slowed to 2m, a level not seen since 2018.
The strong growth appears to have been driven by users signing up to get information about the COVID-19 pandemic. And, with this market penetrated and COVID-19 vaccines on the horizon, we believe the company could begin to see subscriber tailwinds as people turn to TWTR less often for news about the pandemic.
Potential for meaningful downside from user, political risk
All told, the continued broad public apathy toward TWTR combined with less intense political environment and the emergence of a conservative social media platform could negatively impact TWTR user levels, particularly as the COVID-19 tailwind fades or reverses. Assuming all of these factors lead to a 2 million user decline in 2021 would result in a 6% hit to EBITDA.
We think user declines would likely also drive multiple contraction, potentially exacerbated by regulatory risk. The stock is currently trading at 24x 2021E consensus EBITDA, a significant premium to the ~19x average in 2018 and 2019.
Assuming the 6% EBITDA hit and multiple contraction to 19x implies a fair value for the stock of $34, 24% below the recent level.
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Disclosure: I am/we are short NYT, FOXA, TWTR.