Citi analyst Leo Kulp is upgrading the New York Times stock to a buy rating this morning.
Kulp likes what he sees from the Times’ paywall, and thinks the move from printed newspapers to tablets will be “manageable.”
Here’s the main bullet points from his note:
#1 Subscriber break even point relatively low — The number of subscribers required to offset lost advertising revenue is surprisingly low. The reason is that revenue generated by an annual digital subscription will likely dwarf the advertising revenues generated by even heavy users.
#2 Adoption scenarios suggest meaningful upside — Our base case scenario suggests that the paywall will be 15% accretive to EBITDA. Our bear case scenario suggests a slightly negative (less than 1%) impact while a bull case scenario suggests 35% accretion.
#3 Print to tablet migration likely manageable — Print version likely more profitable than tablet, so a mass migration to tablets would be EBITDA negative. However, we don’t expect this as: 1) the cost differential for consumers between all-access digital and print (which includes digital) is small in dollar terms, especially given the NYT’s demographics and 2) print to tablet migrators likely to switch via the NYT website, which is significantly more profitable than third party providers.
Changes to estimates — We’re lowering 2011 EBITDA estimate to reflect higher recent cost guidance and a ramp in the paywall between 2Q11 and 4Q11. We’re increasing our 2011 EBITDA estimate on the paywall impact, which offsets higher cost assumptions.
Key risks — 1) We could be too early; 2) paid adoption might be softer than we expect, and 3) migration of print to digital may be more rapid than we expect.
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