Facebook Inc (FB) Enjoys A Boost From Instagram


Facebook’s Instagram has reached a major milestone with management announcing that the photo sharing platform now has more than 500 million monthly active users, representing 25% growth since September. What’s even better news is that ad agencies are reporting that the growth in ad spend on Instagram isn’t coming at the expense of Facebook Inc (NASDAQ:FB)’s main platform.

Facebook Inc (FB) Enjoys A Boost From Instagram

FB’s Instagram hits 500 million monthly active users

MKM Partners analyst Rob Sanderson noted in a report dated June 22 that Instagram has been growing steadily, adding about 100 million users every nine months. The photo sharing platform is very popular outside the U.S. as 80% of users are from outside the country, representing an increase from 75% in the fall. Instagram also reported that 300 million people or 60% of its monthly active users are using it daily, which reflects a high level of engagement and rivals parent company Facebook’s 66% in the last quarter, the analyst noted.

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Sanderson described the monetization ramp at Instagram as “methodically managed with significant headroom” as industry estimates suggest that the platform contributed $800 million to $900 million of Facebook Inc (NASDAQ:FB)’s revenue last year, marking a substantial increase from the $300 million to $400 million that was estimated in 2014. He added that anecdotes from marketers have consistently suggested that support for Instagram’s platform is still strong and that marketers are eager to spend more on it as inventory grows.

He believes management is “still being patient in nurturing the opportunity.

Twitter monetization has “bullish implications” for Facebook’s Instagram

Interestingly, Sanderson draws some conclusions on Instagram by looking at Twitter Inc (NYSE:TWTR)’s monetization path and using it as a benchmark for Instagram. He explained that rough math indicates that the micro-blogging platform’s ad revenue per user was more than triple Instagram’s ad revenue per user last year at about $6.50 compared to Instagram’s $2.

He believes this gap will close fast because it looks like user engagement trends are much better on Instagram than they are on Twitter. Also he said Facebook’s sales and ad technology are best in class, and brands are “enamored by the rich canvas that Instagram provides.” He added that if Instagram continues at the current pace of user growth and closes the monetization gap with Twitter Inc (NYSE:TWTR) entirely, it would suggest approximately $3.4 billion in ad revenue just from Instagram alone this year. It certainly looks like that gap will close quickly as we heard recently that Instagram is getting more advertising than Twitter now.

In other words, for Facebook Inc (NASDAQ:FB) to meet consensus estimates, the growth in ad revenue from its core would decelerate from 46% last year to $34% this year.

Overall trends positive for Facebook

Nomura analysts Anthony Diclemente and Kevin Rippey said in their June 22 report that on takeaways from their second quarter Internet Advertising Trends Call that Facebook’s overall trends are positive. They spoke with marketing firms Merkle RKG, IgnitionOne and Accuen. One of the most interesting points in their report was that ad spend on Instagram doesn’t appear to be cannibalizing spend on Facebook’s core platform. The Nomura team explained that Instagram has a unique appeal to brands, which is why the increase isn’t cannibalizing the core Facebook Inc (NASDAQ:FB) platform.

They added that Accuen said ad spend growth could decelerate modestly across Facebook’s properties in the second quarter but that acceleration in the Facebook Audience Network may offset it.

Facebook Inc (NASDAQ:FB) shares slipped 0.56% to $113.75 on Wednesday afternoon.

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