Down 8%, Should You Buy the Dip on Newsmax?

Most stocks that debut on the market go through a period of volatility, as investors can take some time to figure out how they should be priced. Even considering that, however, Newsmax (NYSE: NMAX) has been a real yo-yo of an equity in its brief life on the exchange. It blasted many orders of magnitude higher in price on its market debut but almost immediately retreated to a more modest level.

These days, Newsmax trades down almost 8% from its opening-day price on March 31. Let's dive into the stock to determine whether it's been unfairly punished lately and belongs at the lofty highs of its debut or now trades at a more reasonable price.

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Maximizing exposure

Newsmax, for those unfamiliar, is a cable and video streaming news service known for hewing significantly to the right on the political spectrum.

This can be quite a solid business strategy, as evidenced by the enduring success and popularity of Fox News, one of the jewels in the crown of its parent, Fox. In fact, Newsmax considers Fox News to be a direct competitor; by comparison, the incumbent is more moderate and measured than the upstart.

Its political slant is a modern touch, but as a business, Newsmax functions like a traditional broadcaster. The bulk of its revenue comes from advertising, and it makes a bit of scratch with sales of products geared to its audience, such as political-themed books, nutritional supplements, and branded merchandise.

So, given the importance of advertising, the game with Newsmax is to build out its presence as a broadcaster and, in the process, grow its audience. All factors being equal, a larger footprint and greater viewership should translate into more ad revenue.

Management has done a good job with the first part of that equation; it's signed a clutch of deals to have its content beamed on partner networks and streaming services. In mid-May, it announced such an arrangement for a slot on Walt Disney's Hulu+ Live TV.

At that point, the company said confidently that its broadcasting would soon be readily accessible to 60 million households in this country. It claimed this is "on par" with the likes of CNN and, yes, Fox News.

Image source: Getty Images.

Yet the finances haven't (yet, at least) caught up with the deals. In the company's inaugural earnings report as a publicly traded entity, it revealed that first-quarter revenue grew by 12% year over year to $45.3 million. A double-digit gain is nothing to sneeze at. However, it was on the back of a much higher -- 50% -- rise in total viewership (to 33.6 million people, for those counting).

A lag is to be expected, especially since Newsmax is a relative newcomer in the Big Media space and that audience buildup has been rapid. Still, the disparity between viewership and revenue growth is concerning; any investor or person considering this stock should keep a watchful eye on how those two metrics develop over the next quarter or two.

The bottom line is also something of a worry. While Newsmax managed to trim its net loss in the quarter to $17.2 million from the staggering $50.7 million in the year-ago period, it was still extremely deep in the red, as had been its habit before the market debut.

Plus, that reduction isn't as impressive as it first appears.

That's because tens of millions of dollars skewed the year-ago quarter's loss in charges that it booked for anticipated payouts to voting systems specialist Smartmatic. This accounts for a settlement it reached with Smartmatic to retire a defamation lawsuit; under its terms, Newsmax is on the hook to pay roughly $40 million in cash and grant a five-year warrant to buy 2,000 shares of preferred stock.

There could very well be more where that came from, as Newsmax is currently being sued by another electoral tech company, Dominion Voting Systems, for $1.6 billion in damages in a similar lawsuit.

Media companies, news broadcasters, and analysts (hello!) have to take particular care in discussing their subjects. Outside of the financial headaches the Smartmatic and Dominion suits have brought and might bring, such payouts are troubling. They suggest an approach to the news/current affairs business that reeks of carelessness.

If I were an investor, I'd be concerned that Newsmax won't exercise enough self-control to avoid future legal entanglements -- it's aiming to be the swashbuckling rival to Fox News, after all. Yet it's nowhere near the size of Fox the conglomerate or CNN parent Warner Bros Discovery. It will, therefore, have a much tougher time coughing up eight-figure payments to legal foes.

Was that pop deserved?

At this point, we have to consider that the post-IPO share price pop may be an anomaly for Newsmax. Prominence and novelty only go so far, and these days, it looks like that might have been what attracted many of those early buyers (more than a few of whom, it's apparent, quickly became profit-takers when the shares skyrocketed).

Ultimately, from what I'm seeing, Newsmax doesn't look like a buy to me. However, this is a very young stock of a company that only recently leaped into the spotlight. If it can better align audience and revenue growth, avoid cash-draining lawsuits, and at least narrow those net losses consistently, it might become a more tempting investment. For now, though, personally, I'd give its shares a pass.

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Eric Volkman has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney and Warner Bros. Discovery. The Motley Fool has a disclosure policy.