It feels like ITV (LSE: ITV) shares have been struggling since the advent of colour TV. They’re down 51% in five years and 66% over a decade. Yet the FTSE 250 stock’s up 15% in the past month following renewed takeover speculation.

There’s a widespread belief that the broadcaster’s undervalued. So should I buy some ITV shares in case they shoot much higher? Let’s take a look.

A disrupted industry

ITV’s endured a difficult transition away from its reliance on linear TV advertising. This is in structural decline and eventually heading the way of the Dodo.

And while its push into streaming with ITVX has been pretty impressive, it’s up against formidable competition in the shape of deep-pocketed streamers like Netflix, Disney, and Amazon.

ITV’s Studios production arm is more interesting to me, even though it was recently impacted by the Hollywood strikes. It’s responsible for global hit shows like Downton Abbey.

As well as producing content for ITV, it creates shows for other networks and streamers. In Q4, it’s set to deliver The Better Sister for Amazon Prime Video, Hell’s Kitchen for Fox, and Shetland for the BBC.

Trapped value

The share price rose sharply at the end of November when it emerged that several suitors were interested in launching a bid for ITV. Or at least its Studios business.

As AJ Bell investment analyst Dan Coatsworth recently pointed out: “Someone like Netflix could gobble up ITV for a fraction of its annual content spend and access its rich library of programmes.”

Indeed. Netflix spends about $17bn each year on original content, which dwarfs ITV’s meagre market-cap of £2.7bn (about $3.5bn).

Mind you, it would probably have to cough up a bit more than that, as Studios is “potentially worth more than the market value of the entire group,” according to Coatsworth. This highlights how there could be trapped value waiting to be unlocked.

Cheap stock

Now, there’s no evidence that any streaming giant’s seriously interested in acquiring ITV. Just private equity so far. But if ITV’s open to a bidding war, then it’s plausible one of them could swoop in for the Studios bit.

In this scenario, I’d expect the share price to fly higher. After all, at 72p per share, the broadcaster’s trading on a forward price-to-earnings ratio of just 8.

I’ve often looked at ITV’s cheap valuation and toyed with the idea of investing. It’s the sort of rock-bottom valuation that suggests all the pessimism (declining TV business, uncertain streaming future, etc) is already priced in. And then some.

Meanwhile, there’s a 6.8% dividend yield, with the prospective payout covered 1.8 times by expected earnings. Am I talking myself into investing?

The bigger picture

In the nine months to the end of September, group revenue was down 8% year on year to £2.74bn. And full-year Studios revenue is expected to decline mid-single digits. So ITV’s hardly firing on all cylinders.

Stepping back, I don’t see the share price going anywhere unless a bidding war emerges. A streaming giant getting involved would certainly help. But I’m not keen to invest based on takeover potential alone.

As with a good ITV drama, I’ll be following any twists and turns as a curious viewer only.