Netflix (NFLX) stock is up 79% over the past 12 months and trading at a premium valuation. Does the streaming giant have another leg higher, or is the rally running out of steam? With the stock up significantly and shares trading at 38 times analysts' December 2024 earnings estimates, it might seem that shares are running out of juice. However, the company has a secret weapon that it is ready to launch this month and expand as we head into 2025 - a new in-house ad server.
I'm bullish on Netflix because of its new in-house ad server, which should allow the company to capitalize on its growing ad-supported tier and make it a more valuable partner for advertisers, unlocking the next phase of the company's growth.
Things are going well for Netflix. The $324.6 billion company reported strong third-quarter results, growing revenue 15% year-over-year. Meanwhile, it increased operating income by a scorching 52% year-over-year to $2.9 billion, and its operating margin was 30%, up from 22% last year. In addition, ad-supported memberships are becoming a bigger part of the company's business, as they grew a remarkable 35% quarter-over-quarter.
And Netflix's new secret weapon is poised to make this ad-supported tier even more lucrative for the company in the months ahead. Netflix's new ad server will launch in Canada this month and then in additional markets in 2025. Netflix previously relied on Microsoft's (MSFT) ad server, but its new ad server will take advantage of partnerships with Google Live and Trade Desk (TTD).
What is an ad server, and why is this important for Netflix? According to Amazon (AMZN) Web Services (AWS), ad servers are "the technology engines that allow advertisers and publishers to optimize, manage, and distribute ads across a multitude of paid channels," such as Netflix and YouTube. Netflix's ad server will allow it to sell advertising slots to potential advertisers who want to advertise to viewers watching Netflix content.
Digital ads like these are quite valuable to advertisers because they are more targeted and tailored to the specific viewer than traditional broadcast ads. Netflix is very close to the end user and their data, so based on the user's viewing habits and other data, Netflix's server may know that they like golf and can serve them ads for new golf clubs or golf apparel, which are more relevant to them than a broader ad for something they are not interested in.
As you can imagine, these narrowly-targeted, data-driven ads are also more valuable to the advertisers themselves.