Please ensure Javascript is enabled for purposes of website accessibility

3 Ways to Invest in Connected-TV Advertising

By Adam Levy - Jan 23, 2021 at 10:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The connected-TV ad industry is booming. Here's how to take advantage.

The year 2020 saw many couch-dwellers shift much of their TV-viewing time from live cable or broadcast networks to streaming services. Now advertisers are working quickly to catch up to the eyeballs and shift their ad budgets to reflect the evolving consumer behavior.

U.S. marketers will increase their connected-TV ad spend by 40% this year to $11.36 billion, according to estimates from eMarketer. And ad budgets for digital television commercials will continue to grow much faster than overall media ad spending for years to come.

Investors looking to capitalize on this trend have a lot of options. Here are three of the best.

Silhouette of a man in front of dozens of screens.

Image source: Getty Images.

1. The platform owner

In order for consumers to stream more video on their television sets, they have to have a device to facilitate that streaming. That's where Roku (ROKU 4.42%) comes in.

Roku is the leading connected-TV platform in the world, with over 50 million active accounts using its stand-alone devices or its smart TVs. The company generates the bulk of its profits from its growing advertising business.

In exchange for distributing other media companies' streaming apps, Roku takes a percentage of ad inventory in its ad-supported services. Recently, Roku's successfully negotiated content rights for its own ad-supported streaming service The Roku Channel as part of distribution agreements. Roku also allows media partners to put their content in The Roku Channel in exchange for a share of the ad revenue that content generates.

Roku also provides marketers a demand-side platform for buying ads called OneView, a rebranding of its Dataxu acquisition. OneView gives Roku additional reach beyond its own inventory, but it's best suited for advertisements on its own platform due to its more complete data identifying who's watching. Combined with its growing ad inventory as consumers spend more time watching ad-supported streaming (Roku's ad impressions increased 90% in the third quarter), Roku is a one-stop-shop for connected-TV advertisers.

2. The agnostic demand-side platform

Roku's far from the only show in town, and if advertisers want to reach the entire connected-TV ecosystem in one go, The Trade Desk (TTD 5.83%) is their best option. The Trade Desk offers a demand-side platform for ad buyers looking to buy ads programmatically.

Programmatic advertising is when a computer algorithm determines how much an ad buyer is willing to pay for an ad impression based on known information about the viewer and other context. As a simplified example, a male streaming one app late at night may be worth one price to an advertiser, but a female streaming another service during lunch is worth a different price.

Programmatic ad spending is expected to grow even faster than overall connected-TV ad spending in 2021. Marketers will increase their spending on platforms like The Trade Desk by 54% this year versus an increase of 40% for the overall market. While growth will move more in line with the rest of connected-TV's growth in later years, it's still expected to eke out share gains.

As the leading provider of connected-TV ad inventory across platforms, The Trade Desk is in a strong position to capitalize on that growth. But it faces challenges from Roku and other platforms that offer more data on their viewers and continue to develop their ad-buying tools to catch up with The Trade Desk's. That has many ad buyers splitting their purchases, buying ads on Roku's platform through Roku's ad tools and buying other ads through The Trade Desk. Still, The Trade Desk is the best pure bet on the secular growth in programmatic connected-TV ad spend.

3. The big ad-supported streaming service

When it comes to ad-supported streaming services, there are none bigger than Alphabet's (GOOG 2.32%) (GOOGL 1.88%) YouTube. And more and more people are watching YouTube on their television sets. Alphabet said its users streamed over 250 million hours of YouTube to their TV sets per day in March 2019. Since then, the streaming service's presence on TV sets has only expanded alongside growth of YouTube TV and a growing library of professional and amateur content.

With the backing of Google, YouTube can offer ad buyers excellent targeting capabilities and the ability to retarget ads seen on YouTube in other web activities and vice versa. That makes YouTube ads more effective than most other ads sold by other ad-supported streaming services. What's more, YouTube is big enough that it has leverage over distribution platforms like Roku. It's unlikely to give up much in revenue sharing as a result.

Indeed, YouTube's expected to grow its sizable share of U.S. connected-TV advertising from about 18.5% last year to 20% next year, according to eMarketer. Its connected-TV ad revenue will nearly double over the next two years.

However, investors will have to buy Alphabet stock in order to get access to YouTube's growth. They can't just slice off YouTube. While Alphabet isn't a bad stock to own by any means, it doesn't offer the same growth prospects as its smaller competitors due simply to the law of large numbers.

Investors looking for more pure investments in connected-TV growth stocks should stick with Roku and The Trade Desk, but Alphabet investors can get exposure to the fast-growing segment as well with the benefits of the more stable Google business.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$88.54 (4.42%) $3.75
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,155.85 (1.88%) $39.75
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,165.92 (2.32%) $49.13
The Trade Desk Stock Quote
The Trade Desk
TTD
$49.03 (5.83%) $2.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.