Whither traditional online? We got a terrific read last week of two media companies weathering the online storm and I have to tell you, both were pretty darned impressive. I'm talking AOL (AOL) and The New York Times Co. (NYT), although only one, the former, gets any recognition from the marketplace.
Both companies -- one an Internet pioneer and the other perhaps one of the most Internet-challenged companies -- are coping with the challenges in different, yet commendable, ways.
For AOL, the challenge is the hideous legacy of the company, one that grew like a weed, and then fooled Time Warner (TWX) into a horrendous bid that made the company into a laughing stock.
For the New York Times, the challenge is an expense structure designed for the days when display ads were king and the Times was the best vehicle for advertisers to reach wealthy New Yorkers.
It's been three years since AOL became its own separate reporting entity, and after some initial fits and starts that included an expensive acquisition of Huffington Post and a local online news startup called Patch, the company reported one of its biggest beats of the quarter. It was truly an impressive year for AOL, with breakouts on many fronts, including decent revenue growth and the first year-over-year revenue growth in eight years. That's unbelievable. Plus, the company is a gigantic cash generator and plows that capital right back to the shareholders. In three years of being public, the company has returned an astounding $1.3 billion to shareholders, about 50% of the market capitalization. The share count has been reduced by 30%, giving the mastermind behind this turn, CEO Tim Armstrong -- one of the nicest guys in the business, I might add -- a greater than 5% stake in the business, and making him the single-largest shareholder. Now there's some motivation.
The AOL he retained after the spinoff was filled with fat that he is still trimming. That's helped produce a pristine balance sheet with $467 million in cash, despite the aggressive buybacks.
The growth is coming from all sorts of products, legacy, such as MapQuest and Moviefone, video, and, most important, the once-mocked Huffington Post acquisition, which now looks like quite a bargain. Who would have ever thought that at the time?
AOL's become a must-buy for many advertisers because of its tremendous reach, which includes HuffPo, and while Patch isn't yet at the run-rate AOL wants, I suspect that as it gets entrenched it can produce bountiful ad dollars, too.
We all hear that online media companies are increasingly challenged by the glut of copy that has given advertisers the upper hand, but AOL's doing incredibly well and gaining steam even in display ads. The model it pioneered is alive and well, generating great gains for the company.
Unfortunately, it's not doing the same for The New York Times Co., which is why the stock didn't react well to this quarter's numbers. I think that looking at the ad business, however, is a huge mistake. After trying for years to figure out how to capitalize on its tremendous content, the company has created a pay wall that is the envy of the industry and is growing enough to offset display ad losses. No other media company can claim such a distinction. Put simply, the copy is too good, the articles and graphics too compelling, and the competition too pathetic, that you almost have to pay for the Times if you want serious news. It is a tremendous success story and one that doesn't get nearly the recognition it deserves. Perhaps that's because the marketplace demands to see better display ads because subscription revenue is always being denigrated by analysts and the venture capital community, even though it is the only hope for survival for most online publications. Just consider Time and Newsweek. The former's plummeting yet can't afford to charge. And the latter? Well, R.I.P.
Both AOL and the New York Times are beneficiaries of secular trends in their own industries. AOL can continue to win because it has developed mass content that draws an increasing number of viewers that might have otherwise gone to print or even television. The Times is wining because all of the other newspapers in the country can't afford to construct a pay wall and are experiencing terrible declines in display ads as bad, or worse, than the Times is.
While there have been multiple cutbacks in the Times' newsroom, it is common wisdom in journalism circles that Jill Abramson, the executive editor, is putting out the best journalism in the world today -- journalism that is becoming indispensable and, therefore, worth paying more for. Now, if the company would just listen to me when I suggest that it charge more for real estate ads -- most real estate in New York is now sold through the Times -- I think digital dimes could convert to digital dollars, and the display weakness won't even matter.
One other thing, through some shrewd cash management and divestitures, NYT has fixed its balance sheet and been able to build up a nice cash hoard. I have to believe that if it keeps turning around as well as it has and the stock stays around $8.70, it will get a bid -- perhaps from outgoing Mayor Mike Bloomberg -- simply because the Sulzbergers, like the family behind Dow Jones, would like to be paid for their efforts and, unlike the old days, there's no dividend to make good for the years of pain they have suffered supporting the institution. Even with an assumption of all debt, this would be chump change for Bloomberg.
It's because of the improved balance sheet and the takeover possibilities that I believe the stock of the New York Times should be bought. AOL's moved up too much for me to say buy it here. The stock has a history of pulling in when no one's looking. You should look next time, as the trends are getting stronger, not weaker, and the year-over-year revenue growth is going to allow the stock to appeal not just to deep-discount value investors, but to growth investors as well.
Two amazing comebacks. One is getting the kudos it deserves because of its astounding turn and resurrection from the dead, and the other still not being acknowledged because people don't really believe good content can pay for itself. As long as the content stream on the Web declines and the content of the Times continues to improve, it's just a matter of time before The New York Times Co. becomes a growth vehicle, too.