Newsmax Stock Is Set to Join the U.S. Small-Cap Russell 2000 Index in Less Than a Month. Time to Buy?

Newsmax (NMAX), after experiencing a volatile trading period post-IPO, is set to join the Russell 2000 index, which is expected to provide a boost to its share price as ETFs tracking the index purchase the stock. While Newsmax has demonstrated strong revenue growth, increasing 26% to $171 million last year and achieving adjusted EBITDA profitability, concerns remain about its lack of GAAP profitability and the sustainability of its audience growth in the challenging traditional media landscape, leading to a valuation that may not be attractive despite its inclusion in the Russell 2000.

Analysis

Newsmax (NMAX), a recently public conservative media company, experienced significant stock volatility post-IPO, with shares priced at $10 on March 31, surging to $233, and subsequently settling at $18.09 by June 4, still an 80% gain from its IPO price. The company is slated for inclusion in the Russell 2000 index by month-end, a development anticipated to drive demand from index-tracking ETFs. Newsmax's business model encompasses broadcasting, digital publishing including e-books and nutraceuticals (Medix Health), advertising services, and an insurance agency. Financially, Newsmax reported a 26% increase in total revenue to $171 million for the last fiscal year, driven by a surge in affiliate fees from new contractual relationships late in 2023, while advertising revenue remained flat. The company achieved a turnaround in adjusted EBITDA, reporting a $10.3 million profit in 2024 compared to a $10.4 million loss in 2023, primarily due to strong performance in its broadcasting division. First-quarter revenue grew 12% to $45.3 million, and viewership increased by 50%, reaching 33.6 million viewers, although the sustainability of this audience growth is questioned as it may be linked to specific political events. Despite these positive indicators, Newsmax faces challenges, including a lack of GAAP profitability, with a reported net loss of $72.2 million last year (partially attributed to a $53 million one-time legal settlement) and a $17.2 million loss in the first quarter. Furthermore, the stock trades at a high price-to-sales ratio of 14, which is considered unattractive given the headwinds in the traditional media sector and the company's current financial state.

Key Decisions for Investors

• Monitor the impact of Russell 2000 inclusion on NMAX's stock price, but recognize this is a technical factor that might not reflect fundamental improvements.
• Exercise caution due to the company's lack of GAAP profitability and high price-to-sales ratio of 14, despite reported revenue growth and positive adjusted EBITDA.
• Evaluate the sustainability of recent audience growth, looking for evidence beyond event-driven spikes, and assess progress towards consistent GAAP profitability before considering an investment.
• Consider the inherent risks associated with the traditional media industry and the speculative elements influencing the stock before committing capital, noting that a more favorable valuation might be warranted.