Every year, publishers and advertisers from all over the world come to a major advertising event referred to in the industry as the upfronts. Cable networks and ad-supported streaming services use the event to make their cases to strike deals with major advertising agencies and ultimately bring more ad revenue to their platform. Netflix (NFLX 0.39%) has always been absent from the industry event -- until this year. With its ad-supported tier still less than a year old, the company is making its debut at the event -- and it's a big one.

Netflix unveiled promising data about the successful start the company has seen in its advertising business, CNBC reported on Thursday. Shares surged on the news, rising more than 9% by the time the market closed.

Here's a look at what Netflix said about its ad business and what it means for investors.

Insight into Netflix's ad business

Netflix revealed a number of important facts about its ad business to investors this week. First, it said it now has five million active users for its ad-supported service. Even more, one out of every four of its new subscribers in markets where the new tier is available are signing up for this ad-supported service, which has a lower subscription price than other plans. Clearly, there's a lot of demand for this new tier.

For context, Netflix finished up the first quarter of 2023 with 232.5 million paying members. So this means that around 2% of Netflix's members are already using the company's ad-supported tier. 

Attractive economics

It's not surprising that Netflix stock jumped on the news of a big start to its ad business. Management has emphasized in recent earnings calls that the economics of its ad-supported tiers are looking good. Indeed, management said in the company's first-quarter earnings call that its ad-supported tier in the U.S. is already generating more revenue per member than its standard subscription-based plan. So a fast-growing new business with good economics could be a major catalyst for the company and its stock.

Importantly, advertising is typically a lucrative business. In Netflix's case, it's largely accretive since it's based on existing content and content it plans to produce for its other subscribers anyway. Once this new business is scaled, therefore, it will likely be a substantial catalyst for earnings.

In addition to having the potential to generate high revenue and profit per subscriber to the ad tier plan, Netflix's ad-supported plans' lower prices help expand Netflix's addressable market to more price-sensitive consumers. By monetizing part of these plans with ads, Netflix doesn't need to charge a high monthly subscription price. This makes the service more accessible to a larger number of consumers -- particularly in developing countries.

Management certainly thinks there's a big runway for the business. In an earnings call in January, Netflix chief financial officer Spence Neumann said the company believes that its advertising business could grow to be "at least" 10% of its revenue and "hopefully much more over time" as the business matures. With so many new subscribers choosing Netflix's advertising tier, it wouldn't be surprising if the company's ad revenue could grow to 10% of revenue within the next five years.

Time to buy Netflix stock?

With good proof points on the early success of the company's nascent ad business, there's certainly more reason for investors to be upbeat about the stock's long-term potential. But is the stock a low enough price to be a good buy for investors willing to hold shares long-term? 

At first glance, the stock may seem too expensive, trading at about 39 times earnings. But shares are trading at just 25 times analysts' consensus forecast for Netflix's earnings next year. This is because the company is expected to demonstrate significant operating leverage between now and the end of 2024, with its advertising business and other initiatives simultaneously helping revenue growth.

With all these factors in mind, Netflix shares may be more attractive than they might seem at first glance. While the stock certainly isn't a screaming buy, investors may want to at least spend some time taking a closer look at the stock to see if it's worth adding to their portfolios.