Accelerating Cord-Cutting And Rising Costs Will Erode Pricing Power

Key Takeaways

• Structural decline in traditional TV and rising digital competition threaten ITV's revenue growth, pricing power, and market relevance despite digital investments.
  
• Higher production costs and intensified rivalry from global streaming platforms squeeze margins, hinder reinvestment, and increase risks to long-term profitability.
  
• Accelerated digital growth, international content expansion, data-driven efficiency, and cost-saving initiatives position ITV for diversified revenues and stronger long-term profitability.

Catalysts

A vertically integrated production, broadcasting, and streaming company, which creates, owns, and distributes content on various platforms worldwide.

• The ongoing acceleration of cord-cutting and the intensifying digital disruption are likely to further erode ITV's core linear TV audiences, undermining traditional advertising revenue, weakening ITV's pricing power, and driving overall group revenue stagnation or decline despite digital initiatives.
  
• Despite continued investments and progress in its streaming platform ITVX and digital ad platform Planet V, ITV may struggle to scale digital and streaming offerings fast enough to meaningfully offset the structural decline in linear ad revenues, leading to prolonged pressure on total group revenue and a higher risk of earnings contraction over the next several years.
  
• The persistent migration of advertising budgets from broadcasters to dominant digital platforms such as Google, Meta, YouTube, and TikTok, coupled with growing global competition for video advertising dollars, threatens to further erode ITV's share of total advertising spend and compress net margins, especially as digital ad revenue growth decelerates while cost competition in digital intensifies.
  
• ITV faces rising production and content acquisition costs, particularly as the industry sees intensifying competition for original content talent and rights from global streaming giants, which squeezes gross margins and constrains capacity for reinvestment or further efficiency savings, ultimately limiting EBITDA growth and increasing the risk of earnings declines.
  
• The growing bargaining power and market share of global streaming leaders like Netflix, Amazon, and Disney+, combined with the fragmentation of viewer attention across numerous platforms, is set to dilute ITV's mass-market relevance, reduce its negotiating leverage both in content sales and ad partnerships, and make it increasingly difficult to defend premium pricing, endangering both revenue and long-term profitability.

ITV Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ITV compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ITV's revenue will grow by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.4% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach £194.4 million (and earnings per share of £0.05) by about August 2028, up from £186.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 16.5x today. This future PE is greater than the current PE for the GB Media industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 6.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

ITV Future Earnings Per Share Growth

Risks

• ITV has successfully accelerated its digital transformation, with ITVX and Planet V driving double-digit growth in digital revenues, positioning the company to capture an increasing share of the fast-growing digital advertising market, and thereby supporting future revenue and profit growth.
  
• ITV Studios is achieving growth both organically and through strategic acquisitions, gaining international market share by developing strong relationships with global streamers and delivering content with sustained high margins, supporting stable and diversified earnings beyond cyclical UK advertising.
  
• The company's data-driven approach to content commissioning, scheduling, and advertising optimizes content ROI and cost efficiency, preserving or improving operating margins even in a challenging macro environment.
  
• The SME advertising strategy, including collaborative initiatives with Sky and Channel 4 and the use of innovative technology like Generative AI, has the potential to meaningfully expand ITV's advertiser base, leading to new incremental revenues and enhanced digital ad monetization over the long term.
  
• Ongoing cost-saving and efficiency programs, which leverage AI and organizational redesign, have delivered material permanent reductions in non-content costs, directly supporting margin expansion and the company's ability to reinvest in growth and maintain attractive shareholder returns.

Valuation

• The assumed bearish price target for ITV is £0.72, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ITV's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.12, and the most bearish reporting a price target of just £0.72.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £3.7 billion, earnings will come to £194.4 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of £0.82, the bearish analyst price target of £0.72 is 13.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.