Shares in UK broadcaster ITV (LSE: ITV) are having a rotten run at the moment. This year, the share price is down about 33%.
After that huge drop, ITV shares now look very cheap. Should I buy the FTSE 100 stock for my portfolio then? Let’s take a look.
Why ITV’s share price is under pressure
Looking at the investment case for ITV shares today, I see two main issues that concern me.
The first is ITV’s plan to launch a new on-demand streaming platform, ITVX, later this year. While ITV believes this new platform will help it double its digital revenue to £750m by 2026, I think there could be some challenges associated with this new service.
The reason I say this is that streaming space is extremely competitive today and there are many players in the industry including the likes of Netflix, Amazon, Apple, and Disney. Given the intense level of competition, even the big players are having some growth issues. Yesterday, Netflix’s share price fell 35% on the back of weak subscriber growth.
Meanwhile, ITV is going to have to spend an enormous amount of money on content for its new streaming service. For 2022, it expects to spend £1.23bn on content investment. And for 2023 and beyond, it expects to spend around £1.35bn per year. This spending could weigh on profits and have implications for dividends and the share price. The high yield on the stock at the moment (7.1%) indicates that the market has doubts over the sustainability of the dividend payout.
A stock to avoid in a recession
The other big issue for ITV at the moment is the economic environment. Right now, many consumers and businesses across the UK are struggling due to high energy prices. Some financial experts believe we could see a recession soon.
This could have big implications for ITV’s near-term revenues. That’s because in a recession, businesses tend to spend less on advertising. Given that ITV generates a large chunk of its revenue from TV advertising (57% of total revenue last year), the outlook for the company’s top line is uncertain.
It’s worth noting here that earlier this week, analysts at Berenberg downgraded ITV shares from ‘hold’ to ‘sell’ on the back of concerns over advertising. They also cut their price target from 128p to 64p (about 14% below the current share price). “Budgets are increasingly at risk of being cut by advertisers as they begin to suffer the impact of rising inflationary inputs and lower demand from consumers,” they wrote in a research note.
Should I buy ITV shares today?
Now, as I said earlier, ITV shares are cheap right now. At present, the forward-looking price-to-earnings (P/E) ratio is just 5.4. That’s well below the average FTSE 100 P/E ratio. So, one could argue that the two issues I mentioned above are already priced into the stock.
However, considering both risk and reward, I think the best move here is to leave the stock on my watchlist for now.
All things considered, I think there are better stocks to buy today.
