Over the years, I’ve not been a huge fan of investing in ITV (LSE:ITV) shares. Since 2015, the stock has been in a downward trend. Despite trying to stay relevant with new hit shows and reducing reliance on traditional advertising, the business hasn’t really wowed potential investors. Yet with a strong gain in the past few months, is it possible that this is the start of something different for the ITV share price?
Strong November update pushes gains
I have to wait until March to get the full-year results for 2022. However, there was a recent trading update for the nine months through to the end of September.
There were several things in it that I see as being behind sparked a rally in the stock. Not only was total external revenue up 6% versus the same period last year, but non-advertising revenue was up by 13%.
This is key because the business has been trying to diversify away from its traditional dependence on advertising revenue for years. In this set of results, advertising revenue fell to below 50% of the total figure.
Growth was seen for ITV Studios, the part that involves own-brand production of TV shows and films. This part of the business had struggled operationally during the pandemic, with restrictions on filming. However, the recent trading update noted that this arm will exceed 2019 revenues in 2022, a strong statement.
Finally, momentum appears to be building with ITVX, the streaming service that went live in November. The rollout has gone well. The business noted that the service should become the “largest free ad-funded premium streaming service in Europe by revenue.”
There are risks
As with all stocks, ITV comes with risks, of course. Despite the 34% gain in the past three months, the stock is down 31% over the past year. My concern is that the rise could be just another short-term pop that will fade away, with the long-term trend still being lower.
For example, advertising is becoming a smaller part of the business, but it’s still key to ITV. It fell by 2% versus 2021 and I feel it will fall more in 2023 as businesses cut back on marketing spending in order to reduce costs in a tough economic environment.
Also, the move with ITVX to be a free-but-ad-funded streaming service could backfire. Customers might prefer to pay a monthly fee for other streaming providers, but then benefit from having no annoying ad breaks in the middle of a film. Only time will tell on this, but it’s a definite risk I’m aware of going forward.
At 78p, the ITV share price does have plenty of room to move higher before it even reaches the 12-month high of 124p. It certainly has the legs to soar higher, but historical share price performance indicates it probably won’t.
I want to see a more convincing trend higher over a longer period of time before getting too excited here. I’m going to check back at the end of Q1 with the full-year results to see whether this is just another flash-in-the-pan.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023