Over the past six months, The New York Times’s shares (currently trading at $69.20) have posted a disappointing 15.2% loss, well below the S&P 500’s 8.9% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in The New York Times, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think The New York Times Will Underperform?
Even with the cheaper entry price, we’re cautious about The New York Times. Here are three reasons why NYT doesn’t excite us, plus one stock we’d rather own.
1. Weak Growth in Subscribers Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like The New York Times, our preferred volume metric is subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
The New York Times’s subscribers came in at 12.8 million in the latest quarter, and over the last two years, averaged 12.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict The New York Times’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 20.9% for the last 12 months will decrease to 17%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
The New York Times historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 16.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 65%+.
Final Judgment
The New York Times falls short of our quality standards. After the recent drawdown, the stock trades at 23× forward P/E (or $69.20 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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