Advertising is the biggest growth opportunity
Netflix’s advertising-supported subscription tier is central to its longer-term expansion plans. It gives the company an additional source of income from viewers who pay less for their subscriptions, while opening up a potentially significant advertising market.
Management expects advertising revenue to reach $3 billion in 2026. However, the business has been developing more slowly than some analysts had anticipated. In Q2, advertising revenue was reported at approximately $618 million, with growth falling short of analyst expectations. S&P Global subsequently highlighted advertising as a key reason for the cautious market reaction to the results.
Investors will be looking for evidence that Netflix is improving its ability to attract advertisers, increase the value of its advertising inventory and turn its large audience into a more profitable business. Analysts expect advertisement revenue to rise by around 22%, to $806.33 million in Q3, when compared to a year ago.
Live programming could help. Netflix is expanding its live-event offering, including NFL programming, to create more opportunities for advertisers to reach audiences at scale. These events could also help distinguish the service from rivals that compete primarily through on-demand films and series.
The risk is that advertising takes longer to scale than expected. If revenue growth disappoints while Netflix continues investing in its advertising technology and sales infrastructure, investors may question how quickly the new business can contribute meaningfully to profits.