Reports suggest that Instagram is hurting its competitors big time. With growing engagement, Instagram is set to drive FB stock higher.
Instagram, owned by Menlo Park, California-based Facebook Inc (NASDAQ:FB) looks set to become the next big driver for the social media giant. Recent reports suggest that Instagram is hurting competitors like Snapchat big time. Analysts estimate that the platform could contribute as much as $3.5 billion to Facebook's top line numbers in 2017. And given the most recent updates on Instagram's Monthly Active Users (MAUs) and Daily Active Users (DAUs), it's likely that engagement on the platform is inching closer to that on the core Facebook platform, a trend that bodes well for FB stock investors. With each passing day, it seems increasingly likely that Instagram could become a huge catalyst, driving FB stock higher in the couple of years ahead.
User growth and engagement levels on Instagram get more impressive by the day.
Based on the latest update, Instagram had about 600 million Monthly Active Users (MAUs) as of December last year. Instagram's user growth is stunning in itself. The platform which had 300 million MAUs as recently as December 2014, surprised observers by doubling its user base in 2 years. What's even more impressive is the accelerated pace at which it has accumulated MAUs. Starting from December 2014, when it had about 300 million users, the platform added 100 million users in 9 months, followed by another 100 million in as much time, taking its MAU base to 500 million by June 2016. Not a bad feat at all. What's most impressive though, is that Instagram's MAU base shot up by the next 100 million users in just 6 months. The popular photo sharing platform has managed to grow at a fast clip, in spite of its already large base.
However, what's even more impressive is that, apparently, Instagram is not just adding users, it's also holding on to them and getting them to come back to the platform on a regular basis. On Facebook's earnings call with analysts earlier this month, Facebook CEO Mark Zuckerberg announced that Instagram had 400 million DAUs, implying that nearly 67% of the platform's MAUs were active on the service on an average day. That's a boast-worthy number, and as it turns out, that number also matches Facebook's DAU to MAU percentage of about 66%. User engagement on Instagram has shot up over the last few years, and the trend bodes for Facebook, as Adam Levy of The Motley Fool aptly points out:
"At the end of 2013, just over half of Instagram users checked the app daily. Growing daily users will be one of the biggest revenue growth drivers for Facebook going forward and provides a much better indication of the platform's health than monthly users."
Instagram is crushing even its most hyped competitor, Snapchat.
During the same conference call, Zuckerberg also announced that Instagram Stories, arguably a borrowed concept from Snapchat, was being used by 150 million users on a daily basis. That's a big number compared to Snapchat's total 158 million DAUs. In its SEC filing, Snapchat revealed that about 25% of its DAU base was using its Stories feature, which translates to about 40 million DAUs, significantly smaller than that of Instagram Stories. In fact, recent articles on various sites attribute the slowdown in Snapchat's user growth to Instagram. And that's just one of the reasons why Facebook may gain the most from the upcoming Snapchat IPO. For those interested, we recently did a detailed analysis of the Snapchat IPO. And as we highlighted in another recent post, Snapchat's IPO could very well be a dream come true for Twitter and Facebook.
Analysts estimate a huge revenue contribution from Instagram in 2017.
When it comes to Instagram's projected contribution to Facebook's top-line, there are several estimates doing the rounds. While SunTrust Robinson Humphrey’s Rodney Hull initially expected the photo sharing app to contribute $3.5 billion to Facebook's revenue in 2017, he now suggests that the platform could go past his estimate, following the company's December announcement which pegs its MAU base at 600 million, possibly higher than Hull had factored into his model.
It's worth noting though, that some of the estimates by other analysts imply far higher monetization on Instagram. Credit Suisse Group AG's Stephen Ju, for instance, estimated that Instagram would generate $3.2 billion in 2016, which implies that the platform could bring in much more than Hull's estimate of just $3.5 for 2017. Of course, Facebook doesn't break out these numbers, and all of this is pure projection, which involves a reasonable amount of subjectivity. So, there's no way to tell which is a better estimate. However, what you can tell is that Instagram is likely to make a bigger impact on Facebook going forward. More no now, given the growing concern about peaking ad-loads on the core Facebook platform.
Summing it up: Instagram looks set to drive FB stock higher.
Instagram could turn out to be a game changer for Facebook over the coming years. With accelerating user acquisition in absolute terms, and growing engagement levels, Instagram looks set to exceed analysts' estimates of revenue contribution to Facebook's top line numbers in 2017. That apart, it's appears very likely that Instagram is helping Facebook somewhat indirectly, by keep competitors like Snapchat at bay. By the looks of it, Instagram could be a bigger catalyst than most analysts have estimated. And it's just one of the many reasons why FB stock is one of our top stock picks.
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