Connected TV advertising
This was probably the most elaborate and devious prank in internet history.
It all began when Brian Swichkow came up with an idea to use a technique called “targeted advertising” against his roommate. He wrote up a series of ads revealing intimate details about his roomie’s personal life. Then, using a loophole, Brian tricked Facebook
Brian’s flatmate was a professional sword swallower who had a quirky little secret. He could pass a 26” sword down his throat, but swallowing a single vitamin pill made him gag. An embarrassment he never shared with anyone.
Preying on his flatmate’s hang-up, Brian put an ad on Facebook that read: “Trouble swallowing pills? Does it seem ironic that swallowing swords is easy and then small pills make you gag?” As Brian had hoped, the roommate freaked out thinking Facebook was spying on him.
This went on for a couple of weeks. Brian’s roomie kept seeing ad after ad addressing the most personal aspects of his life. He finally grew so paranoid he wouldn’t even talk on the phone. Brian was afraid he might drive his fellow into therapy and soon turned himself in.
I’m sharing this story because it reveals the power of “targeted advertising.” It’s so effective and so lucrative that some of the world’s most powerful tech stocks— think Facebook (FB) and Alphabet (GOOGL)—grew their fortunes entirely on its back.
But as I’ll explain, targeted advertising is taking a big turn—to where Facebook and Google have little control. The CEO of one of the biggest advertising companies called it a “game changer”. And there are just two small tech stocks powering it.
I’ll share those stocks in a moment. But first, let me tell you what this is all about.
“Connected TV”: the next big thing in targeted advertising
As Brian’s story revealed, targeted advertising is a powerful marketing tool that lets advertisers reach a very specific group of people. For example, you can chase down single 30-something males from Boston looking for snazzy dog collars.
Google pioneered targeted advertising in the late 90s when it started tailoring ads based on what folks typed in on Google.com. Then, in 2008, Facebook caught on. The social media giant gave advertisers a way to target people based on the personal data they had willingly (and unwillingly) shared with Facebook.
Unlike billboards and broadcast TV commercials, targeted advertising is very effective—and incredibly lucrative. Facebook and Google—two of the world’s biggest tech stocks—earn 96% and 85% of all their money from it.
But we are stepping into the next phase of targeted advertising. Targeted advertising is now going above and beyond social networks and websites. It’s now invading full force the most expensive advertising medium—TV.
This new advertising format is called “connected TV advertising”. In short, it allows advertisers to track people right into their living rooms and show them personalized ads on TV—which will change TV advertising for good.
And here are the two stocks standing at the forefront of this advertising revolution.
Roku (ROKU)
Most people don’t know this, but Roku (ROKU) doesn’t just sell those little boxes wired to your TV. In addition, Roku makes by far the world’s most popular TV operating system and licenses it out to TV makers.
(TV makers put this kind of operating system in all modern TVs. Without it, TVs couldn’t connect to the internet and stream, say, Netflix
Today one in three TVs sold in America contain Roku’s operating system. And it’s already in 40 million TVs in America. But licensing software to TV makers is not Roku’s real money-making machine. It’s advertising.
You see, Roku reaches four out of five homes in America. And Roku’s audience is more glued to TV than any other company’s—by a long shot. Roku’s average viewer spends 3.5 hours a day watching TV. That’s 3X more than Netflix.
Such an engaged TV audience is a pot of gold for advertisers. And since 2018, Roku has been building an advertising technology that allows advertisers to show personalized ads to its 40 million TV viewers.
And it’s working. Roku’s advertising business is booming. In the last two years, Roku’s revenue from ads grew 3.3X, earning Roku $742 million in 2019. And for the first time in 15 years, Roku earns most of its money from advertising.
Moving forward, I expect Roku’s TV dominance will allow the company to cash in on connected TV advertising big time.
The Trade Desk (TTD)
Most people know The Trade Desk (TTD) as some tech stock that soared a jaw-dropping 2,000% since its IPO in 2016. But few know what it’s really all about.
In human terms, The Trade Desk offers a tool for advertisers to run targeted ads in millions of places across the internet (i.e. websites and mobile apps). On autopilot.
Unlike Facebook and Google, which place ads on their “property,” The Trade Desk pools thousands of data companies and publishers into a single advertising network that lets advertisers to reach the rest of the internet.
After Google and Facebook, The Trade Desk is the largest advertising network by reach. This network is so big that it can reach over 800 million people all over the world—up to 10X a day.
Now The Trade Desk is expanding its advertising network into telly.
Over the past several years, it went into partnerships with streamers Hulu and Disney+—as well as TV networks, including NBC, Fox, ABC, Discovery, ESPN, A&E. Harnessing its technology, The Trade Desk now puts targeted ads in front of people watching these programs on TV.
TV is The Trade Desk’s #1 priority right now. Last year, Jeff Green, co-founder and CEO at The Trade Desk, told investors, “There is nothing I’m more excited about, nothing more game-changing than what is happening in connected TV.”
Like Roku, The Trade Desk is already reaping fruit from its leap into TV. In Q2 2019, its revenues from connected-TV ads soared 2.5X compared to a year ago. This past April, TV ads jumped another 40%. And according to Green, connected TV is now powering most of the company’s growth.
As the world’s biggest independent targeted ad network, I expect The Trade Desk to be one of the biggest drivers of connected TV advertising.
The TV advertising revolution is just starting
Advertisers spend over $70 billion a year on TV. Meanwhile, connected TV ads make up just 10% of TV ad budgets, according to eMarketer.
As connected TV continues to phase out cable, tech advertising companies like The Trade Desk and Roku will steal more and more of the $70 billion pie. In fact, Trade Desk CEO Jeff Green predicts connected TV will “rival and even surpass” traditional TV advertising.
This means this industry has plenty of room to grow 20X, or even 30X. And I’m convinced Roku and The Trade Desk will be two of the biggest players in this advertising revolution claiming most of that growth.
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Disclosure: I hold a position in Roku (ROKU). This is not investment advice.
