How Much Revenue Can Instagram Drive For Facebook In The Future?

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For the first time in its history, Facebook’s (NASDAQ:FB) ads revenues soared above $10 billion in a quarter. Most of the growth in revenues was driven by mobile ad revenues, which now contribute over 88% of revenues, as indicated by the graph below:

Facebook’s mobile photo sharing app Instagram continues to grow in popularity globally. Considering its popularity and the increasing ubiquity of smartphones, the company has been scaling up ads on Instagram. Marketers can advertise on Instagram through sponsored photos or videos across feeds and stories, which leverage the creativity and uniqueness of the platform. The company has also extended these ads capabilities to international markets. In this note, we explore why Instagram will be an important growth driver for Facebook in the future.

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Factors Driving Mobile Ad Revenues

The online advertising market is poised to continue to rise rapidly over the coming years, in line with the increasing ubiquity of smartphones and PCs, coupled with improvement in ad measurement techniques. Users around the world are spending more time on mobile than on any other medium, and over 71% of internet browsing is estimated to be on mobile in 2017. As a result, a rapid rise in mobile ad spending is expected to fuel much of the growth in online advertising. According to Magna Global, the mobile advertising industry is expected to grow to over $215 billion by 2021. These trends indicate that a company with a credible mobile platform can generate substantial revenues in the coming years.

Instagram To Drive Revenues In The Future

Given its massive and still-growing popularity, we believe that Instagram will be an important revenue driver for Facebook in the future due to the following reasons:

  • User base expected to keep growing: Instagram’s user base has risen at a phenomenal pace over the past two years. After crossing the 400 million mark in 2015, its user base swiftly reached 450 million in 2016, and 500 million daily active users in 2017. This implies that Instagram added over 50 million users annually. We expect this momentum to persist in the coming years, although the growth rates could narrow in the future.
  • Engagement levels are high: Instagram’s popular Stories features have improved engagement levels. In its most recent earnings, Facebook reported that Instagram Stories, a clone of Snapchat, now has 300 million daily active users. This is compared to fewer than 200 million active users on Snapchat. These metrics play well for Instagram’s monetization potential in the long run.
  • Facebook can capture a bigger chunk of online ad market: While Facebook has over 6 million advertisers, the advertiser count on Instagram has grown to over 2 million. Furthermore, 98 of the top 100 advertisers on Facebook’s main website also advertised on Instagram. Considering that mobile ads will make up a majority of the online ad market going forward, we believe that Facebook is well-positioned to capture a bigger share as its platform can capture user’s mindshare across both PC and mobile.

We currently have a $165 price estimate for Facebook’s stock, which is slightly below the current market price.

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