Facebook Can Leverage 'Instagram' Success In China

  • Instagram, unlike Facebook and Twitter, is allowed to operate in China.
  • This has enabled the Instagram platform to leverage on the rapid growth of the Chinese smartphone user base and ever expanding internet market.
  • The success of Instagram in China could open the doors for Facebook to benefit from the internet boom in the middle kingdom.

Instagram is Facebook's door to China

Instagram, the popular photo sharing service, has been growing at a frenetic pace ever since its acquisition by Facebook (NASDAQ:FB) in 2012. The platform has gone from lesser than 100 million monthly active users (MAU’s) at the end of 2012 to over 200 million MAU at the end of March 2014.

Can the rapid growth continue at Instagram?

To understand the rate of Instagram’s growth let’s consider the following. The photo sharing platform has outpaced the fast growing micro blogging platform Twitter in terms of user growth. If it continues to grow at this rate, it will not be long before Instagram has more users than Twitter. According to a post on business insider, Instagram has reached 150 million MAU’s in less than half the time Twitter took to do the same. However, following its initially exorbitant growth in MAU’s, Twitter user base has been slowing down over the last one year triggering a fear among investors and a fall in the stock price. Will Instagram follow the Twitter script or will it fulfill Zuckerberg’s aim of a 1 billion user strong platform? The chart below displays the rapid growth of Instagram over the last two years.

INstagram user growth rate 1

Source: Business Insider

Instagram: China opportunity can lead to rapid growth

China is the fastest growing smartphone market in the world with over 500 million smartphone users, a number that is rapidly growing. Presence in the middle kingdom is what differentiates Instagram from its parent company Facebook and micro-blogging site Twitter, who have been censored from making their services available in China.

According to a post on cnet.com, Instagram app has climbed from a rank of 312 in the year 2011 to a current rank of 66 on Apple’s App store in China. So what has helped Instagram succeed in a market Facebook and Twitter haven’t been allowed to enter?

Instagram had recently introduced the sharing option for Sina Weibo, the popular micro-blogging platform in China with over 400 million registered users and close to 150 million MAU’s. The move has benefited Instagram with more number of its images being shared on the ‘Twitter of China’ resulting in increased users in China for the photo sharing platform.

A number of companies are also beginning to consider allocating marketing budgets for Instagram in order to capitalise on the increasing mentions the site is finding among Chinese users, with a month-on-month increase 12.8% increase every month between November 2013 and January 2014.

Given the increased traction Instagram is finding in China, the growth potential for the photo sharing remains huge, considering that the market represents over 500 million users who are inaccessible to Twitter and Facebook. The app might me well on Zuckerberg’s goal to see a billion plus users on the photo sharing platform, which would presents Facebook with a huge scale to leverage and monetize the platform. Instagram in fact might be Facebook’s door to the huge online potential of the Chinese market.

However, considering the current stock price levels, we continue to believe Facebook to be an expensive buy at its current valuation multiples with a LTM P/E multiple of 87.7 and a LTM P/S multiple of 18.8. At these valuations Facebook presents an investment option for an aggressive investor with a higher appetite for risks, given the huge expectations priced into the stock. Our risky outlook is reflected in our current hold rating for Facebook. View our Facebook stock analysis.

To see Facebook’s latest stock price movement, click here (NASDAQ:FB)

Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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