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After falling 8.6% yesterday (22 October), the ITV (LSE:ITV) share price is now 75% lower than 10 years ago. This came after the broadcaster’s largest shareholder, Liberty Global, sold half its stake for about £135m.
Why did ITV fall?
The share price fall puts ITV at 69p. Given that this is towards a 52-week low, it’s perhaps a little surprising that Liberty chose now to slash its 10% stake. After all, it had held it for a decade.
As Dan Coatsworth, head of markets at AJ Bell, points out: “Investors might be concerned as to why Liberty Global has chosen to sell half of its position at time when the shares were trading close to a six-month low. Many large investors wait for a share price to be high before selling down.”
To be fair, ITV notes that Liberty had a “previously stated intention to divest of non-core assets“. So this doesn’t look like too much of a concern.
Acquisition target
There has been speculation for years that ITV could be acquired. A cheap valuation and the attractive Studios arm — which makes content for other broadcasters and streamers — give credence to the rumours.
Perhaps Liberty’s selling down will help pave the way for a sale or breakup of ITV. This might unlock some sort of shareholder value, especially as the media group is trading at just eight times forecast earnings.
Then again, would someone want the whole lot or just the Studios bit? I can’t imagine Netflix (NASDAQ:NFLX) would be interested in linear TV and the ITXVX streaming platform. Presumably, it would just want Studios and the back catalogue of content.
But who would want to invest in the remaining part, if it remained public? Without the Studios unit, I personally wouldn’t have any interest in ITV.
Losing relevance
Netflix is worth dwelling on because it’s arguably ITV’s biggest rival now that the FTSE 250 firm has fully embraced streaming.
Back in 2015, Netflix reported revenue of $6.8bn, with an operating profit of $306m. Meanwhile, ITV’s total external revenue was £2.9bn, with adjusted EBITA (earnings before interest, taxes, and amortisation) of £865m. ITV was therefore far more profitable.
By last year, though, this had totally flipped. Netflix’s operating profit was approximately $10.4bn on revenue of $39bn. ITV’s external revenue was £3.5bn, but adjusted EBITA was down to just £542m.
These figures explain both ITV’s 75% share price crash and Netflix’s 1,000% rise. Essentially, the streaming giant has taken viewers from the former, and I don’t expect this to reverse meaningfully.
Nuance
Having said that, the reality is admittedly more nuanced because ITV actually distributes content to Netflix and other global streamers. For example, Studios made The Devil’s Hour for Amazon Prime Video and Run Away for Netflix.
The growing Studios arm is why I think ITV stock is probably undervalued. And right now, investors are being offered a well-covered 7.3% dividend yield to sit tight and wait for that value to potentially be realised. So income investors might want to consider the stock.
For me, though, I prefer Netflix stock. Granted, it trades at a far higher 34 times next year’s earnings, which adds risk if profits come in light. But the streaming leader’s growth potential — particularly from digital advertising — seems far more attractive.
