Netflix (NFLX -0.97%) shares surged Wednesday after the streaming leader beat subscriber expectations in its third quarter and guided for subscriber additions to accelerate in the fourth quarter.

While that was encouraging news after the company saw subscriber growth fall in each of the first two quarters of the year, there may be an even better reason to get excited about the stock right now.

The streaming giant is getting set to launch its new advertising business, and it could be huge. Here's what you need to know.

A person holding a remote in front of a TV.

Image source: Getty Images.

A long time coming

In early November, the company will begin offering a new basic-with-ads tier in 12 countries that makes up roughly 75% of global TV ad spend. The plan will cost 20% to 40% less than the typical basic plan. In the U.S., for example, Netflix plans to offer the basic with ads plan for $6.99/month, which compares to its $9.99/month price for its traditional basic plan. Ad plans will have roughly five minutes of advertising per hour.

The company tempered expectations for the new revenue stream, saying it wasn't expected to be material to fourth-quarter results because it was launching in the middle of the quarter, and it will take time for it to gain momentum and build up an audience. 

Netflix estimates that the market for TV advertising in the 12 countries where it's launching the ad tier is worth $140 billion, or about half of the size of the $300 billion pay-TV and streaming industry. In other words, Netflix just expanded its addressable market by roughly 50%.

The company also said that it gets 8% of total TV time in the U.S. and the U.K., two of its most established markets. If it were to convert that share into a share of the advertising market, it would give the company more than $10 billion in high-margin revenue.

Of course, Netflix isn't going to immediately sign up 200 million ad-based subscribers, and the company needs to be careful that the ad tier attracts the right kind of subscribers rather than cannibalizing premium accounts, but the opportunity for ad monetization is clearly there.

Additionally, by offering a product at a lower price point, Netflix now has a subscription that can directly compete with lower-priced options like Disney+, Hulu's ad tier, Apple TV+, and Paramount+.

Why advertising could be a juggernaut

Netflix said that the advertisers' reaction to its new offering has been "extremely positive," and it's easy to see why. Netflix offers advertisers something they can't get anywhere else, a massive audience of more than 200 million households around the world with one platform. It gives advertisers the kind of targeting that you can't get with linear TV, and Netflix will be video-based and mostly on a large screen, which advertisers prefer.

There are also two major secular trends that favor Netflix's advertising business. First, growth in social media advertising has gotten crushed by Apple's new restrictions on ad targeting, cutting off a valuable opportunity for advertisers and sending them to look for alternatives.

Second, the linear TV ad ecosystem is collapsing as audiences are drawn to streaming. As co-CEO Reed Hastings noted on the earnings call, the more valuable 18 to 49 demographic has been even faster to migrate over to streaming services, meaning Netflix has just the kind of audience that TV advertisers want.

It's unclear how much ads on Netflix will cost advertisers, but they're likely to come at a premium. Variety had reported that the company was planning to start negotiations from $65 per thousand impressions (CPM), which is considered fairly high for the industry. Currently, viewers are watching billions of hours of content per week on Netflix. Even if the company had just 100 million hours of ad-based viewing a week and it charged $65 per CPM for 30-second ads, it would bring in $65 million in ad revenue per week, or more than $3 billion a year.

How fast Netflix can monetize the opportunity will depend on how fast subscribers sign up for the ad tier, but the ads business has a lot of potential to reignite growth for a stock that Wall Street seems to have bailed on.

While subscriber growth may not return to its previous heights, it's a mistake to think the growth story is over for Netflix as a business.