Global Tech Competition Will Erode Margins Though Modest Recovery Emerges

Key Takeaways

• Shifting advertising spend to global tech giants and declines in traditional TV viewership threaten STV's core revenue and challenge its ability to sustain net margins.
  
• Rising production costs, increased competition, and regulatory uncertainties may undermine profitability and limit STV's ability to offset audience fragmentation.
  
• Declining linear TV audiences, digital competition, slow streaming growth, rising content costs, and regulatory threats collectively challenge STV Group's revenue stability and future profitability.

Catalysts

Produces and broadcasts television programs in the United Kingdom.

• While STV Group continues to benefit from growth in digital streaming, advertising revenue, and robust Studios international expansion, the accelerating shift of advertising spend to global tech platforms like Google and Meta threatens the long-term growth in broadcast and even digital advertising, ultimately risking future top-line revenue and pressure on net margins as alternative digital platforms capture a greater share of marketing budgets.
  
• Despite the group's significant investments in content and a growing IP library, there is a persistent risk that continued decline in linear TV viewership, particularly among younger audiences, will erode STV's traditional core revenue base faster than its STV Player and digital platforms can compensate, constraining earnings growth and undermining efforts to stabilize margins.
  
• Although STV Studios has achieved record revenues and increased international activity by scaling up its portfolio, high fixed content production costs and intensifying global competition for talent may make it difficult to sustain current operating margins, especially as the company lacks the scale or geographic diversification of major streaming rivals, potentially exposing future earnings to cost shocks or lower-margin work.
  
• While ongoing regulatory and policy changes-such as new restrictions on advertising high fat, salt, and sugar foods-may seem manageable in the near term, further tightening of ad rules or unpredictable UK and European policy interventions could shrink monetization opportunities over the medium
• to long-term, directly impacting advertising revenues and related profitability.
  
• Although STV Group's strategic diversification and partnerships aim to future-proof the business, the proliferating number of new streaming entrants and rising market fragmentation are likely to dilute STV's audience share and bargaining power with advertisers, making it increasingly difficult to maintain scale efficiencies and stable net margins as the broader competitive landscape evolves.

STV Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on STV Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming STV Group's revenue will grow by 8.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.7% today to 6.3% in 3 years time.
• The bearish analysts expect earnings to reach £15.3 million (and earnings per share of £0.25) by about July 2028, up from £10.8 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 9.6x on those 2028 earnings, up from 8.2x today. This future PE is lower than the current PE for the GB Media industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

STV Group Future Earnings Per Share Growth

Risks

• The continued decline in linear TV viewership, particularly among younger demographics and as shown by shifting consumption to on-demand and streaming, presents a risk to STV Group's core advertising revenue and long-term earnings resilience, since the company's broadcast business still relies on linear TV's mass reach.
  
• Accelerating migration of advertising spend to global digital platforms such as Google, Meta, and Amazon could compress STV's share of the advertising market over time, limiting digital revenue growth and potentially eroding overall top-line revenue.
  
• There is a risk that STV Group may not scale its proprietary digital platforms and streaming services (STV Player) quickly or significantly enough to offset the persistent declines in traditional advertising, as growth in monthly active users and subscribers has been sluggish, which could negatively affect future revenues and margins.
  
• The industry-wide trend of escalating content production costs, together with commissioners applying margin pressure and a tough commissioning backdrop, may erode profitability for STV's Studios division, making it harder to sustain or grow operating margins even amid increasing revenue.
  
• Regulatory changes, such as the introduction of restrictions on advertising for high fat, salt, and sugar (HFSS) foods, bring uncertainty and the potential for a material adverse impact on advertising revenue, particularly if advertisers are unable to redirect budgets, which would harm both near-term and long-term revenue streams.

Valuation

• The assumed bearish price target for STV Group is £2.51, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of STV Group'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 £3.73, and the most bearish reporting a price target of just £2.51.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £241.3 million, earnings will come to £15.3 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of £1.93, the bearish analyst price target of £2.51 is 23.1% higher.
  
• 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.