Netflix shook up the entertainment industry with its 2022 advertising launch, and the company just made it clear that the ad tier is rapidly being embraced.
At an industry conference last week, Netflix's president of advertising, Amy Reinhard, shared that the company had signed up more than 23 million subscribers, up from the 15 million it reported two months earlier. At that rate, the company could add 30 million ad-tier subscribers this year.
While that's a positive sign for Netflix, as it shows that it's attracting new subscribers and helping current subscribers stay on the platform but pay less, it's even better news for stocks that are well positioned to take advantage of the new advertising boom in connected TV. Let's look at two such winners.
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1. Roku
Roku (ROKU -10.29%) is the leading advertising distribution platform. It's the company that, more than any other, partners with streamers like Netflix to give viewers a seamless and convenient viewing experience.
Roku finished its most recent quarter with 75.8 million active accounts, and advertising revenue from its streaming partners makes up a significant percentage of its revenue. Typically, Roku takes a 30% cut of ad inventory on its platform and sells itself. That means Roku is arguably the biggest winner from Netflix's successful ramp of its ad tier.
Netflix's launch has also paved the way for other streamers such as Disney and Amazon, which are also introducing ad tiers on their platforms. As a result, the streaming industry is making a decided shift toward advertising. It will take years for that to play out, as many ad-free subscribers are content with their current subscription offering.
However, Roku is in a great position to capitalize on the growth of connected TV, given its large and growing installed base, and the stock is trading at a discount now after crashing through 2022 as digital advertising growth slowed down and it posted wide losses after overinvesting in the business earlier. Since then, Roku has slimmed down and the company is now delivering solid top-line growth and positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
With the growth in ad-based streaming, Roku stock looks set to keep climbing higher.
2. The Trade Desk
Another stock that looks set to capitalize on the growth of connected TV is The Trade Desk (TTD 1.67%), the leading independent demand-side platform in ad tech. It provides a self-serve, cloud-based platform that helps ad agencies and brands manage campaigns and optimize them.
Trade Desk has been a big winner on the stock market over its history, up roughly 2,000% since its 2016 IPO, and its management team sees a significant opportunity in connected TV. Trade Desk already has more than 20 premium partners in connected TV, including Disney, Fox, and Major League Baseball.
The company is also delivering strong growth in a challenging environment for advertising. Revenue jumped 25% in its third quarter, and interest in connected TV is already fueling that demand. It continues to expand its partnerships in Unified ID 2.0, its cookieless protocol, with streamers such as Warner Bros. Discovery and Disney, which should also help drive Trade Desk adoption for connected TV on those platforms.
Finally, the company is making strides in artificial intelligence (AI) with its new Kokai AI platform, which will make it easier for ad agencies and brands to take advantage of the targeting and customization potential of connected TV, which linear TV doesn't offer.
The Trade Desk might be expensive according to traditional metrics, but the stock is also down 43% from its peak in 2021, and it's chasing a $1 trillion addressable market, meaning there's still a huge opportunity in front of it. With surging growth expected in connected TV, The Trade Desk looks like a good bet to be a winner.
