This Media Stock Has a $1 Billion Market Cap. A Pending Lawsuit Could Reap as Much as $2.7 Billion in Damages.

Few industries have felt disruption in the 21st century more than the news business. The industry is still adapting to the disruption of the internet, which killed profitable parts of the business, such as the classifieds section, and made the print business an expensive, antiquated endeavor that is likely on its way out.

Artificial intelligence has presented new challenges, particularly by changing the way people search for and get information. Because AI models often provide answers to queries right away, there is less need for consumers to click on articles, which is hurting page views and subscription conversions.

USA Today (NYSE:TDAY) has dealt with all of these challenges and then some. While the company is still figuring out how to run an independent news and content organization profitably, the stock has seen many ups and downs over the past five years.

Right now, it's at roughly a $1 billion market cap. A potential lawsuit it is undertaking could result in up to $2.7 billion in damages.

Image source: Getty Images.

USA Today has been adapting to the digital age

In 2019, New Media Investment Group, a conglomerate of regional and local newspapers and websites, merged with Gannett, the owner of USA Today, to form the country's largest newspaper company. At the time, New Media was the technical acquirer and valued Gannett at $1.4 billion, which shows how the stock has performed since.

As the world of news and content in general has shifted, USA Today, the name the company recently adopted, has tried to adapt, focusing on digital news subscriptions and digital advertising.

The company also has a digital marketing services business for small- and medium-sized businesses and now licenses its content to large artificial intelligence companies. Meanwhile, the company's print business and associated expenses continue to shrink.

In 2027, management hopes digital revenue will account for over 50% of total revenue. While the company has certainly made progress, investors remain cautious about whether the core business has yet to find a sustainable model. AI has thrown another wrinkle into the equation.

A potential game-changing lawsuit against Google

Over the years, news publishers have argued that Alphabet’s (NASDAQ:GOOG)(NASDAQ:GOOGL) Google has effectively held a monopoly in the online advertising market, making it difficult for them to negotiate prices and ad space and depriving them of revenue.

This argument picked up steam when the U.S. Department of Justice sued Google in 2023, alleging that its Ad Exchange "engaged in 15 years of sustained conduct that had -- and continues to have -- the effect of driving out rivals, diminishing competition, inflating advertising costs, reducing revenues for news publishers and content creators, snuffing out innovation, and harming the exchange of information and ideas in the public sphere."

A federal judge sided with the DOJ and ultimately required Google to change its advertising practices.

Being the largest news publisher in the country, USA Today has felt the impact of Google's practices and long complained about them. USA Today piggybacked on the DOJ's lawsuit and separately sued Google for similar monopolistic practices, seeking to restore competition in publishers' advertising.

Because a federal judge has already sided with the DOJ, the often lengthy litigation process has sped up. Recently, Google's motion for summary judgment was denied, allowing USA Today's and other publishers' claims to proceed to trial. USA Today's trial is slated to begin on April 5, 2027.

This ruling also revealed that USA Today estimates damages from Google's advertising practices at around $900 million through 2024. Not only does USA Today CEO Mike Reed expect to update this figure ahead of trial, but there is the potential for treble damages under U.S. antitrust law. That would be $2.7 billion based on the 2024 figure.

Another good sign is that USA Today is being represented by the prominent antitrust firm Kellogg Hansen, which has secured both the largest and second-largest antitrust legal victories in the U.S. The firm is also taking on the case on a contingency basis.

With trial set to begin in about five months, there's a real chance Google settles. Christine Bartholomew, a law professor at the University at Buffalo who specializes in antitrust, told Bloomberg Law that, statistically, most antitrust cases settle. That said, Google certainly has the resources to go to trial if it so chooses.

What this could mean for USA Today stock

Sitting at a roughly $1 billion market cap, even a settlement in the hundreds of millions would make a significant difference. The 2019 merger resulted in USA Today taking on significant debt from Apollo Global Management.

When the deal closed, the combined entity had close to $1.8 billion of debt. USA Today has now reduced its debt to under $1 billion, although it has had to implement numerous cost-cutting measures that have been painful for its journalists.

With net debt of roughly $885 million, USA Today has an enterprise value of roughly $1.88 billion. Analysts at Citigroup recently estimated a $690 million settlement with Google. Assuming that comes to fruition and USA Today puts all or most of it toward paying down debt, which I assume management will do, that should result in a new market cap of nearly $1.7 billion, implying 70% upside for the stock in Citigroup's scenario, although some of the debt is convertible, meaning there could be dilution. The significant legal fees incurred will likely also lower the final funds available to reinvest.

Paying down significant debt would also remove a significant portion of the company's over-$20 million in quarterly interest expense, resulting in substantial earnings accretion. Finally, reducing the debt overhang could allow USA Today to invest more in the business and go on the offensive.

While things look good, investors shouldn't assume that Google will choose to settle, which could delay any potential damages. Google could also emerge victorious if it goes to trial. It's also very difficult to put a number on potential damages.

I'm bullish on the outcome of the lawsuit and own USA Today stock, but I would reiterate that there is a wide range of outcomes.

Citigroup is an advertising partner of Motley Fool Money. Bram Berkowitz has positions in USA Today. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends USA Today. The Motley Fool has a disclosure policy.