Global Streaming Competition Will Crush Traditional Ad Revenues

Key Takeaways

• Shifting viewer habits toward streaming and dominance of global players threaten ITV's ad revenue, market share, and relevance, making digital growth insufficient to offset declines.
  
• Mounting content costs and regulatory pressures are expected to squeeze margins further, while fragmented advertising and limited pricing power undermine future earnings.
  
• Accelerating digital growth, operational discipline, and global content demand strengthen revenue resilience, margin expansion, and capacity for increased shareholder returns.

Catalysts

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

• The accelerating shift in consumer preferences away from traditional linear TV toward global on-demand streaming services is likely to put sustained downward pressure on ITV's core TV advertising revenue, risking structural erosion in the company's top line that cannot be offset by digital growth alone.
  
• The growing dominance of international streaming giants such as Netflix, Amazon, and Disney+ is expected to further fragment viewership and erode ITV's domestic market share, undermining the long-term relevance and pricing power of both ITV broadcast and its ITVX streaming platform, and reducing both revenue and margin potential.
  
• Ongoing fragmentation of advertising spend across diverse digital and social platforms is leading to persistent downward pressure on advertising rates (CPMs), with ITV's addressable ad growth at risk of slowing as targeted ad effectiveness is impeded by regulation and competition, further threatening future earnings.
  
• Escalating costs of content production, driven by intense competition for talent and rights among global players, are likely to continue compressing ITV's margins, as higher capital expenditure on programming will be required to retain audience relevance, while any attempts to pass these costs onto advertisers or consumers may prove unsustainable.
  
• Regulatory uncertainty, including the anticipated UK restrictions on advertising for less healthy foods and evolving privacy legislation, threatens to reduce addressable ad inventory and effectiveness, adding significant risk to both revenue growth and net margin trajectories over the medium term.

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 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.7% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach £127.0 million (and earnings per share of £0.03) by about July 2028, down from £408.0 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 17.9x on those 2028 earnings, up from 7.1x today. This future PE is greater than the current PE for the GB Media industry at 12.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

ITV Future Earnings Per Share Growth

Risks

• ITV has achieved strong and accelerating growth in digital revenues, with ITVX streaming ahead of plan and becoming profitable earlier than expected, which is likely to support both future revenue growth and margin expansion.
  
• The company's Studios division is highly diversified internationally, has demonstrated record profits despite industry strikes, and is positioned to benefit from rising demand for cost-effective, high-quality scripted and unscripted content globally, increasing both top-line resilience and earnings.
  
• Robust and continuous cost-saving and efficiency programs, with a proven track record of exceeding targets and embedding a culture of permanent operational discipline, are structurally improving net margins and allowing for ongoing reinvestment in content.
  
• ITV has developed significant first-party data assets, enabling enhanced targeted advertising and new partnerships (such as with YouTube and in sectors like automotive and retail), which can drive incremental advertising revenues and operational leverage.
  
• The company maintains a strong balance sheet with low leverage, consistent free cash flow generation, a surplus pension fund, and disciplined capital allocation-all factors that underpin dividend payments and further potential shareholder returns via buybacks or growth investments.

Valuation

• The assumed bearish price target for ITV is £0.61, 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 £1.1, and the most bearish reporting a price target of just £0.61.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £3.6 billion, earnings will come to £127.0 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of £0.77, the bearish analyst price target of £0.61 is 27.0% lower.
• 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.