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.
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 (NASDAQ:ROKU) 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 (NASDAQ:TTD) 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 (NASDAQ:GOOG) (NASDAQ:GOOGL) 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.