As always, Netflix (NFLX -3.92%) is among the first wave of companies to schedule its earnings report for the calendar quarter. The streaming-TV specialist recently announced it will report its second-quarter financial results on July 19 at 3 p.m. PT.
While the typical metrics investors watch when the company announces its results (subscriber additions, revenue growth, and operating margin) will be important, there's one item in the report that may receive extra attention: any commentary from management about the company's plans to enter the digital advertising space. Many analysts and investors are hoping connected-TV (CTV) ads will become Netflix's next major growth driver.
Ads are coming to Netflix
Shares of Netflix have cratered this year, falling nearly 70% year to date. Investors have been disappointed in the company's stalling user growth. In the first quarter of 2022, the company's total paid subscribers were about flat sequentially. Even worse, management guided for second-quarter paid subscribers to decrease about 2 million compared to Q1.
High subscriber penetration in the company's mature markets, numerous households sharing accounts, and intensifying competition in the space are collectively creating a strong growth headwind for the company, management explained. While Netflix believes its improving content slate and some new restrictions around subscribers sharing their accounts with other households could help offset the revenue headwind from potentially slower subscriber growth in the coming years, it's the talk of ads that has many investors excited.
After years of resisting ads, Netflix is finally open to the idea. "[I]n terms of the profit potential, ... the online ad market has advanced," said Netflix CEO Reed Hastings in the company's first-quarter earnings call. Specifically, management explained that it is considering offering lower-priced plans with ads. This will give consumers more choice as to how they want to access the service, Hastings explained.
Unfortunately, bringing ads to its service could take time. Hastings said it could take a year or two to roll something out.
Why ads could be a major catalyst for the stock
It's not surprising that Netflix is considering ads for its service: The opportunity is enormous. eMarketer estimates that 2021 CTV ad spend in the U.S. alone was about $14.4 billion, and the research firm expects that by 2024, that number will grow to nearly $30 billion.
It's easy to see why the company's foray into advertising could be a significant catalyst for the stock. With more than 220 million subscribers, the company likely has many subscribers who would be interested in a lower-priced, ad-supported tier. Some international markets where streaming service subscriptions are a larger portion of the average consumer's discretionary spending, in particular, could have a strong appetite for an ad-supported service.
By both cracking down on subscription sharing and launching an ad-supported tier, management believes it can eventually reaccelerate revenue growth.
To see what management says about any progress it has made on its plans to launch an ad service, investors can tune into Netflix's second-quarter report after market close on Tuesday, July 19.
