Shares of Roku, Inc. (NASDAQ: ROKU) soared more than 8% on Wednesday. This unexpected increase caught the attention of investors, even though no major news was released regarding the leading streaming distribution platform. Instead, market players seemed to react to several smaller news items, one of which included Amazon.com, Inc. (AMZN) planning to introduce an ad-based tier for Prime Video.
Today, streaming stocks showed a broadly upward trend, potentially driven by rumors of a recovery in the connected TV ad market during the second quarter. In addition, Netflix, Inc. (NFLX) received two analyst upgrades, amplifying positive sentiments surrounding the streamer’s “paid sharing” rollout and its expanding ad business.
With Amazon joining the advertising realm, all major U.S. streaming platforms are now offering some form of ad product. This development is particularly significant for Roku since the company generates a substantial portion of its revenue from advertising, earning a 30% share of ad inventory from its streaming partners on the distribution platform.
According to a report from The Wall Street Journal, Amazon intends to launch an ad-supported tier to bolster revenue from its video service. Given that Amazon currently ranks as the third-largest digital advertiser in the U.S., behind Alphabet Inc. (GOOG) and Meta Platforms, Inc. (META), this move into video aligns with its strategic goals.
The pricing strategy for Amazon’s ad tier remains uncertain, as the company currently offers Prime Video for free to its Prime members, who also enjoy benefits like free shipping and returns.
This news comes at a time when Amazon is actively seeking cost-cutting measures and striving to improve profitability.
Though The Wall Street Journal mentions that Amazon’s discussions regarding an ad tier are still in the early stages, such a move would represent the latest transition towards ad-based streaming, following similar decisions by Netflix and Walt Disney.
Although it will take time for the ad-based audience to grow, this development presents a long-term growth opportunity for Roku. Despite the stock still being down over 80% from its peak during the pandemic, Roku stands to gain significantly if the ad market begins to rebound.