The tech-heavy Nasdaq Composite has slipped into bear market territory, falling 30.7% from its all-time high. That sharp sell-off has been driven, in part, by rampant inflation, which threatens to push the economy into a recession. But inflation is a temporary headwind, and it doesn't change the fact that streaming entertainment is becoming more popular.
In fact, streaming accounted for nearly 32% of all television viewing time in May 2022, up from 26% in the same month last year, according to data from Nielsen. That marks the third consecutive month in which streaming has set a viewership record, and Roku (ROKU 0.34%) and The Trade Desk (TTD 1.79%) are well-positioned to capitalize on that trend.
Here's why both growth stocks are worth buying now.
The streaming industry is a powder keg
The streaming industry is like a powder keg waiting to explode. Last year, advertisers spent $80 billion on U.S. television ads, but only 18% of that total went to connected TV (CTV) devices. However, consumers are rapidly shifting away from linear programming and ad dollars are sure to follow. In fact, U.S. television ad spend will hit $104 billion by 2026, and 37% of that total will go to CTV, according to eMarketer.
Building on that idea, Walt Disney and Netflix -- the two most popular streaming services in the world -- plan to launch ad-supported products. An ad-supported tier of Disney+ will debut later this year, and Netflix could have an ad-supported service within the next six months.
Ultimately, linear programming will eventually cease to exist, meaning all television ad spend will flow through CTV devices. For context, IMARC Group values the global television ad market at $344 billion by 2026. That puts Roku and The Trade Desk in front of a massive market opportunity.
The case for Roku
Roku connects viewers with virtually every premium and ad-supported streaming service, and it monetizes its platform through digital ad sales and digital payments services. In 2008, shortly after Netflix introduced the first streaming service, Roku became a pioneer by releasing the first streaming device. The company has since parlayed its first-mover status into a more substantial competitive advantage.
NASDAQ: ROKU
Key Data Points
Today, Roku is the most popular streaming platform in the U.S., Canada, and Mexico as measured by viewer engagement. Thanks to that dominance, Roku devices captured 47% of programmatic CTV ad spend in the first quarter of 2022, nearly triple the market share of the next closest competitor, according to data from Pixalate.
Not surprisingly, Roku is growing quickly. Active accounts climbed 14% to 61.3 million in the past year, and while engagement decelerated -- streaming hours rose just 14% to 20.9 billion -- Roku still outpaced the 10% growth seen in the broader streaming industry. In other words, the company is still taking market share. In turn, revenue soared 44% to $2.9 billion in the past year, and free cash flow climbed 16% to $183 million.
Roku recently brought its ad business to Mexico, entering its first market outside of North America. That means there is a tremendous runway for international monetization, and management is working to capitalize on that opportunity. Last year, Roku began selling devices in Germany, and it debuted new Roku TV models in the U.K., Brazil, and several other Latin American countries.
Additionally, Roku aims to reinforce its leadership position and boost engagement through The Roku Channel, its own ad-supported streaming service. The Roku Channel currently features hundreds of live television channels and thousands of movies and shows, all free. And Roku is expanding aggressively into original content in an effort to further differentiate its service. That strategy has worked well so far, as The Roku Channel ranked among the top five channels on the platform in the last quarter. If the company can maintain its momentum, this growth stock could soar in the coming years.
The case for The Trade Desk
The Trade Desk operates a demand-side platform (DSP) that helps advertisers plan, measure, and optimize data-driven campaigns across desktop, mobile, and CTV devices. Its core innovation is the bid-factor-based architecture that allows advertisers to set expressive targeting parameters more easily than the line-item-based systems used by other DSPs.
NASDAQ: TTD
Key Data Points
The Trade Desk also leans on artificial intelligence to boost conversion rates, creating a network effect that makes its decisioning engine more effective with each campaign powered by its platform. To that end, The Trade Desk is the leading independent DSP, meaning it is the largest buy-side platform that doesn't own any content. That distinguishes it from walled gardens like Alphabet, a company that is incentivized to steer ad buyers toward its own inventory on platforms like YouTube and Google Search.
That competitive edge has helped The Trade Desk keep its customer retention above 95% for eight consecutive years, and it has fueled strong financial results. Revenue climbed 44% to $1.3 billion over the past year, fueled by particularly strong growth in CTV ad spend, and free cash flow rose 12% to $394 million. More importantly, management is executing on a strong growth strategy that should keep the company growing for years to come.
For instance, The Trade Desk recently launched OpenPath, a platform that allows publishers (i.e., sellers of ad inventory) to integrate directly with its DSP. In other words, OpenPath makes the ad supply chain more efficient by removing sell-side platforms (like Google Ad Manager) from the equation. That means advertisers pay less for ad space and publishers make more. That type of innovation should help The Trade Desk retain its leadership position and capitalize on its massive addressable market. That's why this growth stock is a buy.
