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Netflix's (NASDAQ: NFLX) top-line momentum is impressive. Revenue surged in 2018, rising 35% year over year, to $16 billion. But the huge sums of money Netflix is spending on content to attract and keep its customer base is weighing on the company's financials.
Free cash flow, or cash flow from operations less capital expenditures, was negative $3 billion last year. And in 2019, free cash flow is expected to be negative $3.5 billion.
Fortunately for Netflix, the company could unleash a key catalyst to boost its financials at any point in time. Doing so, however, will require a major shift in Netflix's monetization strategy: ads. Despite how farfetched this idea may seem for a service that's currently entirely ad free, some experts believe Netflix executives may eventually cave and do exactly this.
Image source: Getty Images.
Momentum in connected TV
You can bet Netflix is giving ads a second look. The momentum in the sector recently is mind-boggling.
Consider trends at The Trade Desk (NASDAQ: TTD), whose stock has soared 174% over the past 12 months as ad spend on its platform, which helps marketers, brands, and ad agencies optimize their ad spend programmatically, has soared. Growth in ads on connected TV, in particular, has been a boon for the company. Connected TV ad spend on its platform increased ninefold in 2018, compared to 2017. CTV "is the most exciting channel that we've ever seen [and] probably ever will see," said The Trade Desk CEO Jeff Green in the company's fourth-quarter earnings call.
Streaming-TV platform Roku (NASDAQ: ROKU) has similarly seen strong momentum, driven in large part by growth in ads on its platform. The company's platform revenue surged 79% year over year in Q1. A key driver of this growth was a more than doubling of its monetized video-ad impressions during the quarter -- a trend management expects to continue the rest of the year.
Telaria (NYSE: TLRA), which helps publishers like Hulu (owned by Walt Disney) optimize their ad inventory to be sold programmatically, saw its connected-TV-related revenue soar 169% year over year in Q1.
What industry experts are saying
The steep costs of original content and the undeniable momentum in connected TV ads have industry experts betting Netflix may soon change its tune about ads.
"[Netflix has] envied YouTube's international reach for a very long time," Green said in an interview with Recode Media late last year. He added, "I don't think there's any chance that they can catch up to YouTube, ... unless they go ad-funded in the same way that YouTube is."