Returns as of 12/22/2021
Returns as of 12/22/2021
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Connected-TV advertising is one of the fastest-growing segments of digital advertising in the industry. U.S. marketers will double their spending from 2021 by 2024, according to analysts at eMarketer, reaching $29.5 billion in ad spend that year.
Hulu, the Walt Disney (NYSE:DIS)-controlled streaming service, is the dominant force in connected-TV advertising. It brought in $2.1 billion over the past 12 months, according to data from Kantar. eMarketer thinks that number’s even higher, expecting it to generate $3.1 billion this year. Based on Disney’s reported average revenue per user, the number appears closer to eMarketer’s estimate.
But as ad-supported video on demand (AVOD) increases in popularity and media companies create more options, can Hulu maintain its share of the fast-growing market?
Hulu original series “Only Murders in the Building.” Image source: Hulu.
Hulu falls into a category of ad-supported streaming services that offer premium content like that found on television. But the number of services offering similar high-quality content is growing quickly.
Hulu’s co-owner, Comcast (NASDAQ:CMCSA), launched Peacock last year, which offers access to lots of content from NBCUniversal’s back catalog of films and television. That said, the service has struggled to gain traction and retain viewers despite its free tier. Comcast may opt to pull back some content from Hulu next year in favor of putting it exclusively on Peacock in the hopes of boosting viewership, which could also hurt viewership on Hulu.
Additionally, ViacomCBS (NASDAQ:VIAC) relaunched CBS All Access earlier this year as Paramount+. The rebranding came with tons of new content and has ushered in strong subscriber growth since.
Total streaming subscribers across its services — which also includes Showtime, BET+, and Noggin — grew from 30 million at the start of 2021 to 47 million as of the end of the third quarter. Kantar says Paramount+ was the second-biggest winner of connected-TV ad spend after Hulu, bringing in $822 million.
Advertisers like premium AVOD services because they offer familiar content quality and ad formats as traditional TV. That makes shifting TV ad budgets to connected TV easier. Advertisers know the content is going to be high quality and can use the same exact advertisements.
On top of that, services like Hulu require users to sign up and log in to use the service. That’s not true with many completely free ad-supported services. One major exception to that is Roku‘s (NASDAQ:ROKU) streaming service, The Roku Channel.
Roku often touts the value of its logged-in environment over other AVOD services. It has more data on who’s watching, such as demographics and payment information — which can be used to obtain a whole host of additional targeting info. But those same advantages apply to paid ad-supported services like Hulu.
As such, logged-in environments should continue to win the bulk of ad spending, even if more free ad-supported services gain traction. The value of the ad inventory is simply much higher.
Hulu is the leader in the premium AVOD space and should keep that lead for the foreseeable future. It has more subscribers than the competition, with 43.8 million, and is steadily growing that subscriber base. Its position as part of the Disney bundle should help it keep churn rates low relative to competing services.
While there are question marks around the future of its content library and how things will shake out with NBCUniversal’s shows next year, Hulu is backed by the Disney-media powerhouse, which is dedicating an extra $8 billion for content in 2022.
As Hulu’s ad revenue per user trends higher, it has several options at its disposal. It can slash the price or run more promotions for its ad-supported service in order to increase its subscriber base. Alternatively, it can reinvest in additional content for the service in order to increase engagement and create more ad inventory. Both would create more ad-revenue opportunities.
A third option: It could let additional revenue flow through to the bottom line. That seems least likely, at least until Disney takes full ownership of the streaming service in 2024. The company isn’t planning for Hulu to break even until 2023.
As such, Hulu should be able to grow its subscriber base and engagement steadily through 2024 by reinvesting in growth. That should allow it to keep pace with the industry and roughly double its ad revenue from today.
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Stock Advisor launched in February of 2002. Returns as of 12/22/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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