Instagram On Track To Become A $5 Billion Money Spinner For Facebook Inc. (FB)

  • Facebook and WhatsApp get their media attention, but what about Instagram?.
  • Tremendous user base growth means a significant revenue upside.
  • Can Instagram meet analyst revenue estimates in 2016 and 2018 ?

Facebook Inc. (NSDQ:FB) has more than 1.7 billion monthly active users, and if you double count or even triple count, then Facebook’s entire group of assets, which includes Instagram and WhatsApp will have at least 3.2+ billion users. It’s a huge number, and even more interesting is the fact that all three platforms - Facebook, WhatsApp and Instagram - are growing rapidly.

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Facebook’s acquisitions are bound to become social media folklore in the future. Facebook bought WhatsApp for an eye-popping $19 billion in 2014 when the social messaging app had 600 million users. In two years that number has already zipped past one billion users. At the time of the buyout, nobody really understood why Facebook wanted to pay that much money for a company that was hardly making any money, but now it represents huge future potential that is yet unmonetized.

Also read: How Instagram Is Going To Drive Facebook Stock Higher

Two years before the WhatsApp acquisition, Facebook bought Instagram, a then 13 member company with 30 million users, for one billion dollars. Barely a week before the buyout Instagram raised 50 million dollars in funding from private investors, bringing the valuation of the photo-and-video-sharing mobile app company to $500 million. But Facebook decided to pay twice that amount to get the mobile player under its fold, a move that looks like a masterstroke today.

Why Did Facebook Invest in Them?

One thing that was common to both those acquisitions was user growth and mobile usage. Very early during its formative years, Facebook realised the need to get strong on the mobile platform. Both WhatsApp and Instagram gave considerable mobile user base to the company and they were growing. Today we can see the wisdom in that as PC sales decline and the performance and usage gaps between smartphones, tablets and laptops are rapidly thinning. The effect of that has become so pronounced that during Q2, Facebook derived more than 84% of its advertising income from mobile advertising.

Also read: Facebook Inc. Stock Will Rise Above $150 Faster Than Many Think

But despite the astute decisions that these acquisitions represent, Facebook still gets the most media attention as a social media platform. It’s understandable that analysts would want to focus on the many initiatives that Facebook has rolled out in recent times - Instant Articles, Facebook Live and so on. WhatsApp gets attention because the industry of messaging apps has already become much bigger than social media ever was.

But caught between a social giant and a messaging giant, Instagram is the one that’s left out in the cold despite its stellar performance, as we’ll see.

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Since Facebook acquired Instagram, the app company has grown its user base by over ten times - from around 50 million to now over 500 million. If growth continues at the same pace for another few years Instagram could end up rivalling the user base of WhatsApp or even the parent platform Facebook itself.

One source shows that ad revenues from Instagram are on track to reach $1.5 billion this year. Over the next two to three years that figure is expected to grow to $5 billion.

When you look at it from a ‘contribution to total revenues’ viewpoint, you’ll see that average revenue per user now stands at $3.82. So, when user growth is strong, overall revenues will continue to expand as long as they keep ARPU growing as well. The way it looks right now Instagram will easily cross that $1.5 billion estimate for this year and start contributing significantly to ARPU increases across the board.

What Investors Should be Watching

So those are the numbers investors need to be watching - growth in active user base on Instagram, and overall ARPU growth for both platforms. The key driver of this growth will be the way Facebook leverages the multi-platform model to craft an irresistible proposition for advertisers. And one of the indicators of that metric is Facebook’s advertiser base, which has already gone well beyond 3 million. Last year they were at 2 million, meaning a 50% growth in one year.

Also read: User Saturation Concerns Are Overdone For Facebook Inc Stock

And that’s exactly why the option for Facebook’s advertisers to include Instagram users in their campaigns is a key move that facilitated ad revenue growth. And it will continue to deliver well into the next several quarters.

Advertisers don’t really care which platform their returns come from. All they care about is how many eyeballs they can reach, and Facebook is making it easier for them to reach larger and larger pools of potential customers. That’s the bottom line.

Considering such a scenario, it’s easy to see why Instagram will play a critical role in the company’s performance over the next few fiscals.

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