The shares are cheap for a reason because it faces major structural challenges
Thursday 14 Apr 2022 Author: Mark Gardner

Being a shareholder in media group ITV (ITV) has been quite a rollercoaster ride. Between 1991 and 2000 the shares enjoyed a stellar run, moving from circa 27p to nearly 10 times higher at 269p. They subsequently fell back a lot, bumbled along and then fell some more.

It wasn’t until after markets started to recover from the global financial crisis in 2009 that ITV’s shares enjoyed another run – this time pushing ahead to 280p in 2015. Since then, it’s been a gradual decline with the odd false dawn to excite and then disappoint investors.

This is one of Britain’s best-known brands, so why has ITV ultimately failed to generate value for shareholders on a consistent basis?


The latest worry is that ITV’s new streaming platform ITVX will require a considerable increase in spending to create the type of content that will attract enough people to make the proposition a success.

But if you go back a few years, it’s easy to understand why investors have lost interest. If anything, perennial takeover rumours have been the only thing to breathe any life into the share price for a short period.

ITV’s free to air broadcasting model is operationally geared which means its operating profit is sensitive to any change in sales volumes. If there is a slowdown in advertising, ITV’s earnings will be hit disproportionately hard.

This looks increasingly likely as advertisers shift their budgets away from television in favour of online channels.

Another concern is that at a time when ITV is launching a new digital platform, consumers are experiencing streaming fatigue. Given the rapid increase in the cost of living, and the associated desire or need to pare back spending, it is questionable if there will be the appetite for another streaming service.

There is a high degree of uncertainty regarding ITV’s ability to compete with the plethora of streaming companies, from a size, scale and resource perspective.

The costs associated with launching ITVX are considerable. And across the board ITV intends to invest £1.23 billion in content this year and a further £1.3 billion next year. As a result of these additional costs, consensus forecasts for ITV’s operating profit next year have fallen from £800 million to £550 million.


Berenberg media analyst Sarah Simon has expressed caution regarding television’s declining appeal as an advertising medium. She says: ‘While advertising has surprised positively, we cannot help thinking that this is inconsistent with the decline in consumption of ITV content.’

In 2021 television viewers watched 15.1 billion hours on ITV Hub and its linear channels. This
was a decline of 9% from 2020 when viewers watched 16.6 billion hours.

Research by Insider Intelligence suggests digital video advertising spending will continue to eat away at traditional television budgets. It estimates that in 2022, television will account for just 12.4% of total media spending, down from 13.3% in 2021.

Despite being in lockdown for the first three months of the year, a resurgence in advertising spending enabled ITV to report a 24% increase in group revenue to £3.4 billion for 2021. Of this amount, advertising revenue equated to just under £2 billion. However, the extent to which this level of advertising expenditure is sustainable is in doubt.

The macroeconomic outlook for advertising has turned negative given the current geopolitical uncertainties linked to Russia’s invasion of Ukraine, coupled with global input costs, supply chain
issues and concerns about consumer spending. This is a potential concern for ITV given its high degree of sensitivity to a slowdown in demand for advertising.

Consumers are likely to reduce their levels of consumption to accommodate their squeezed finances. UK economic growth is likely to slow as consumption accounts for approximately 68% of growth. Under this scenario the impact on demand for television advertising demand and ITV’s earnings would be negative.

There is a reason why ITV’s shares are so cheap, trading on a mere 5.5 times forward earnings with a 6% dividend yield. This low valuation reflects its struggle for relevance in a digital world and the longer-term structural challenges facing the company.


ITV’s new streaming platform will be the centrepiece of its strategy to double digital revenue growth to £750 million by 2026.

The intention is to launch ITVX in the fourth quarter. It will enable viewers to see some of ITV’s programmes before they are broadcast on linear TV, as well as its back catalogue of shows.

The service will be free to watch with advertisements. However, there will be an optional subscription that will offer a premiere each week, and 15,000 hours of content. ITV will replace both ITV Hub and ITV Hub+.

However, ITV faces similar challenges to its larger American streaming cousins, intense competition for viewers’ attention coupled with the escalating cost of creating popular content.

Recent research by Wells Fargo suggests the cost of admission for those entering the streaming wars will continue to escalate. For
the nine largest media and technology companies it forecasts a 10% jump in costs in 2022 to $140.5 billion.

ITV intends to invest £1.23 billion in programmes this year, and a further £1.3 billion next year. This is a modest outlay compared with Disney which is expected to spend $33 billion on content in its 2022 fiscal year. Netflix’s content spending is expected to jump 13% this year to $19 billion.

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