The Trade Desk Stock: Netflix Is Ready (NASDAQ:TTD)

Netflix is open to advertising. What does this mean for The Trade Desk?

Netflix’s (NFLX) subscriber growth has hit a wall as the streaming giant just reported losing 200k subs in 1Q22 and is expecting to lose another 2m subs in 2Q22. As much as management has previously spoken out against advertising, CEO Reed Hastings is finally open to introduce a lower-priced, ad-supported tier in the next 1-2 years. Roughly 3 years ago, Trade Desk (NASDAQ:TTD) CEO Jeff Green predicted that Netflix would sell advertising. Today, that prediction has come true.

Bottom line, this is a bullish signal for Trade Desk as the independent platform is a major beneficiary of the secular shift from traditional TV to CTV advertising. Put simply, Netflix’s decision to offer an ad-supported tier will only accelerate the decline in linear ad budgets as Discovery+, HBO, Hulu and Disney+ have moved into (or have announced to go into) the AVOD (Advertising-based Video On Demand) landscape.

Why won’t Netflix build its own walled garden like Google’s YouTube?

There’s no doubt that demand will be extremely strong as Netflix has arguably the best inventory with audience that brands cannot typically reach with television advertising. To some, it might make sense for Netflix to turn itself into a walled garden and keep 3rd party ad platforms away from taking a cut of ad dollars, but Netflix CEO Reed Hastings thinks otherwise:

We can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people. So we can stay out of that and really be focused on our members creating that great experience and then again, getting monetized in a first-class way by a range of different companies who offer that service.

– Reed Hastings on Netflix 1Q22 earnings

In short, Netflix is a content company, so building/maintaining a proprietary demand-side platform is simply too costly from a publisher’s standpoint. To advertisers/agencies, it’s much easier to manage all CTV campaigns from a single platform like Trade Desk vs. having to separately manage ads on a Netflix DSP. This is because the same commercial videos shown on Netflix can also be shown on Roku, Hulu and Peacock.

What are the implications for entertainment subscription services in general?

Netflix’s decision to go into advertising shows that a subscription-only model will ultimately become unsustainable as it runs out of new subscribers. Consumers desire content, but may not necessarily want to pay for it. This is where advertisers come in to make sure publishers can continue to deliver.

While video streaming in general has embraced AVOD, I believe gaming subscription services will likely be the next group to adopt an ad-supported model. For instance, Sony is developing a program to allow advertisers to run in-game advertising. While it’s too early to tell, this could pave the way for an ad-based tier for services like PlayStation Now (now PlayStation Plus), Xbox Game Pass and Nintendo Switch Online. After all, advertising does help expand the user base by catering to the more price-sensitive cohort.

Conclusion

Does the world need more advertising? Probably not. But does the world need more targeted advertising to reduce the inefficiency of subscription-only services? Absolutely. As much as consumers generally hate advertising, putting up with occasional 15-second commercials is still a more economic option vs. paying a $14.99 monthly subscriptions (humans are funny sometimes).

As the largest independent demand-side platform, Trade Desk is firmly positioned as a major beneficiary of an increasingly ad-supported future for digital entertainment. The stock has corrected over 40% from all-time-high, and valuation has become less frothy at 20x 2022 EV/sales. While I wouldn’t consider shares to be a bargain in this interest rate environment, I believe some nibbling at this level can be justified for long-term investors.