What happened
Netflix (NFLX 2.51%) made a surprise move yesterday regarding its ad-supported tier, and the decision is sending shock waves across the digital advertising landscape. As a result of the unexpected decision, many digital advertising stocks are crumbling today on what was already a decidedly down day for Wall Street.
Shares of The Trade Desk (TTD 0.53%) and Magnite (MGNI 1.43%) were hit the hardest, down 8.2% and 7.8%, respectively, at 12:21 p.m. ET. At the same time, Roku (ROKU -1.39%) and Criteo (CRTO 1.67%) also slumped, down 5.5% and 7.3%, respectively.
So what
In the wake of its first subscriber loss in more than a decade, Netflix made the long-awaited decision to develop a paid, ad-supported tier for its streaming video service. The rumor mill has been in overdrive in recent weeks regarding both potential acquisitions and advertising partnerships. Netflix put all the rumors to rest yesterday, making a decision that no one had seen coming. The company announced yesterday it had picked Microsoft (MSFT 2.22%) as its ad-tech partner.
The decision was a blow to Comcast's NBCUniversal and Alphabet's Google, who were considered the top contenders to help Netflix begin selling ads, with Roku, The Trade Desk and others emerging as dark horse candidates. In fact, many had considered Roku a natural choice, given the company's history with Netflix. Roku's signature streaming device was actually developed under CEO Anthony Wood in collaboration with Netflix back in 2007 before being spun off.
In a blog post that broke the news, Netflix said it had "selected Microsoft as our global advertising technology and sales partner." The streaming pioneer cited Microsoft's "proven ability to support all our advertising needs as we work together to build a new ad-supported offering." The company went on to laud Microsoft's flexibility and potential to innovate over time, while also saying the company offered "strong privacy protections for our members."
Microsoft confirmed the deal, saying, "All ads served on Netflix will be exclusively available through the Microsoft platform. Today's announcement also endorses Microsoft's approach to privacy, which is built on protecting customers' information."
Now what
In the wake of Netflix's announcement, Stephens analyst Nicholas Zangler weighed in on the ramifications, noting that "virtually all" of his industry contacts were surprised at the decision. The choice was particularly notable in that it left all the traditional experts in connected TV out in the cold. Late last year, Microsoft acquired the Xandr programmatic advertising platform from AT&T, which operates on both the supply side (publishers selling ads) and the demand side (automated ad buying). Zangler argues that the choice of Microsoft leaves "no economics" for the likes of The Trade Desk, Magnite, Criteo, and others.
It's important to note that in the grand scheme of things, the loss of one streaming service -- even one as important as Netflix -- isn't the end of the world for any of these digital advertisers. Furthermore, as a result of the bear market and the general hostility toward high-growth tech stocks -- particularly those that sported frothy valuations -- The Trade Desk, Roku, Magnite, and Criteo have all been beaten down from their highs last year.
Data by YCharts
Yet even in the midst of steep stock price declines, there are reasons to buy. The Trade Desk is the undisputed industry leader in programmatic advertising and a disruptive force in the ad-tech space. Roku is the No. 1 streaming platform in North America, taking the top spots in the U.S., Canada, and Mexico, and is in the midst of a far-reaching international expansion. The company also makes the lion's share of its revenue from the digital advertising that appears on its service-agnostic platform, which boasts more than 10,000 channels.
All that makes The Trade Desk and Roku my top choices to profit from an ongoing shift to digital advertising.
