Facebook Inc (NASDAQ:FB) growth in the mobile segment for the second quarter was so impressive it took investors by surprise. Deutsche Bank analysts (Ross Sandler, Lloyd Walmsley, Deepak Mathivanan and Kevin LaBuz) analyzed Facebook’s growth numbers, and why the numbers might continue moving up with the support of Instagram.


Mobile Newsfeeds undersold

Deutsche Bank analysts have detailed that Facebook Newsfeeds are undersold. Analysts have used eCPM for mobile to derive key drivers in all revenue areas.

In the United States, Facebook Inc (NASDAQ:FB) sold mobile newsfeed ads at around $3-$6. Likewise in Western Europe, Facebook sold newsfeed ads for similar rates, where a range was arrived at by whether the ad was purchased directly (typically higher eCPM for guaranteed placement) or via a strategic partner in the marketplace (PMD, typically lower eCPM via the CPC auction). The difference between eCPM between U.S./Western Europe and APAC/ROW are the same, as Facebook sees ad prices in emerging economies are around 30 percent of the U.S. equivalent.

In the first quarter of 2013, Facebook sold 6.4 trillion ads. Applying $1.65 mobile eCPM and the 30 percent of the revenue, analysts calculate around 226 billion mobile ad impression, or only 3.5 percent of total company ad impressions in the first quarter of 2013.

Users will continue to increase

As far as user growth is concerned, analysts expect that monthly active users will be huge over the next few years with around more than 2 billion smartphones in the world and a current TAM of around 4 billion users excluding China. Decline in mobile will not be rapid, and will be a gradual process, according to analysts. Monthly active users are expected to increase in smartphones market at 15 percent in the U.S./U.K. and at 50 percent in emerging markets, in 2014, and declining modestly thereafter.

Instagram a catalyst for Facebook

Instagram will be one of the key growth drivers for Facebook Inc (NASDAQ:FB) apart from  core mobile revenue. Instagram’s user base stands at around 150 million and adding 50 million every six months. Geographies like the United States and Western Europe are contributing more compared to Facebook’s core mobile user. Further, the analysts note that the engagement level of Instagram users is more than that of Facebook users. Therefore if the size of Instagram is 40 percent of the size of Facebook’s mobile user base then it could be as large as 50 percent of available potential ad impressions compared to the social networker.

Instagram pictures draw more users to the site compared to Facebook’s text based mobile newsfeed ads. Advertisers may also look forward to adopting Instagram as they are experiencing success with Facebook Inc (NASDAQ:FB)’s mobile newsfeed.

The research firm’s analysts are raising their core Facebook revenue estimates by 2% and have added $1.8B to 2015 revenue for Instagram. DB’s new $62 TP is based on 40x P/E, 20x EBITDA, and a 2% FCF yield on 2015.