Huge news came out this week when Netflix (NFLX -1.85%) management announced on the first-quarter earnings call that the company plans to launch an advertising-supported tier for its subscription streaming service. There were scant details about what the price point would be, how it would work, or the real reasons why Netflix is deciding to embrace ads now. However, the fact that Netflix lost subscribers quarter over quarter for the first time in a while and is projecting declining subscribers again in the second quarter suggests that management is worried its ad-free service has hit saturation in key markets.
Netflix's announcement also suggests a boost is coming to the connected-TV (CTV) advertising industry. Here are two stocks that stand to benefit if Netflix embraces advertising on its platform.
1. The Trade Desk
The Trade Desk (TTD -0.03%) is a technology platform for advertising buyers. More specifically, it runs an automated, self-service, and cloud-based demand-side platform for the digital advertisers looking to escape the walled gardens of Alphabet and Meta Platforms. Advertisers can run video, audio, and display advertisements through The Trade Desk across all sorts of digital devices like laptops and mobile phones.
One of the fastest-growing revenue lines for The Trade Desk is CTV advertising. Management doesn't break out exact revenue numbers for the business, but it is constantly highlighting that CTV advertising is growing the fastest right now. In November 2021, it added NBC's Peacock streaming service to its advertising platform. This will allow advertisers to easily buy slots on the streaming service, with The Trade Desk getting a cut of all dollars spent.
In the fourth quarter of 2021, The Trade Desk's revenue grew 24% year over year to $396 million. A lot of this is driven by CTV advertising and all the advertising dollars that are flowing to the industry. In fact, analysts estimate CTV advertising grew at a 60% clip in 2021, making it one of the fastest-growing industries in the world. If Netflix jumps into advertising, it will need a demand-side platform (or several) to consistently fill advertising slots. It is likely The Trade Desk would be one of these partners.
Speaking of advertising partners, one company Netflix cannot avoid in CTV advertising is Roku (ROKU -2.69%). Roku is a CTV device maker with 60.1 million active accounts using its operating system and has a robust advertising/services business. Advertising is where the majority of its money is made. Similar to The Trade Desk, it also has its own demand-side platform, called OneView, though it is much smaller and focused on serving the CTV market.
When an advertisement gets played on a Roku TV, Roku gets a cut of whatever the advertiser paid. The exact details of these revenue-sharing agreements are not public, and some applications like YouTube may not kick back anything to Roku, but all you need are the financials to see how fast Roku is growing this business. Platform revenue hit $704 million in Q4 2021, up 49% year over year and up from only $85 million in Q4 2017. A lot of this growth is coming from an increase in CTV ads played on Roku devices.
If Netflix jumps into the advertising game, this will likely boost Roku's platform business. There is also the possibility it utilizes the OneView demand-side platform, which would be huge for Roku's advertising business. However, one negative that could come from this is competition with the Roku Channel, Roku's free ad-supported streaming channel, which reaches 80 million people and more than doubled streaming hours in 2021. If Netflix's ad-supported service takes streaming hours away from the Roku Channel, that will be a headwind for Roku's business.
There is a bit of uncertainty as to how all the details will play out, but if Netflix decides to embrace advertising in a big way, it is likely that both The Trade Desk and Roku will benefit.