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Facebook (FB): The Instagram Story Looks Compelling

support@smarteranalyst.com (Ben Mahaney)

Facebook (FB) could exhibit somewhat of a revenue surprise if it were to transition ad-units for “buy buttons” on Instagram according to Morgan Stanley. The rationale does sound good, as Facebook’s large installed base of users on Instagram (1.1B users) could be more responsive to a direct buying experience, as opposed to the current format in which ads are displayed and lead to a separate landing page. There could be new ad-units in store, which could appeal to marketers and help with the diminishing narrative of marketer ROI when compare to other platforms, namely Google.

To sustain stock price gains, the emphasis among analysts and investors has shifted from the core Facebook app and towards Instagram. Assuming there’s a good pipeline of ad features attached to Instagram; advertising revenue will continue to trend higher. Speculation tied to social commerce via more streamlined ad formats and payment processing done natively on Instagram could be indicative of a bigger advertising opportunity.

Analyst Adam Jonas at Morgan Stanley believes that the social commerce opportunity is worth $4 billion incremental revenue, assuming Facebook takes 10% of sales revenue from each transaction (depending on what advertisers are willing to bid for conversions). Social commerce could result in $35.7 billion in sales on the platform assuming 5% market share relative to total e-commerce activity (which could be doable).

There are a number of challenges tied to this, as Facebook’s payment features aren’t really used or adopted by much of the userbase. Efforts to improve payment features, or to store credit card or debit card information for on-platform purchases could be challenging given the perceived headwinds from privacy skeptics and so forth. But, even without a meaningful number of users adopting Facebook’s payment features advertisers already use Facebook with the intention of selling goods and services via e-commerce sites like Shopify or Amazon 3rd-party listings. Therefore, the additional ad format and the ability to buy directly off of Facebook would then force Facebook to dedicate resources into creating a separate store tied to Facebook Pages, which would be another derivative product like Facebook Marketplace, but more specific to various e-commerce brands.

The technical challenges aside, the userbase has to be willing to adopt this specific feature, and with the way most advertisers have clung to the status quo, it wouldn’t be surprising if Facebook maintained what seems to be an effective enough of a model. Facebook has attempted to introduce a “buy button” feature back in 2014, and even offered payment functionality to send money back and forth from friends. Eventually, though other payments apps like Venmo took over the social payment segment, and Facebook also ditched efforts tied to on-platform commerce. In other words, there might not be much of a social commerce narrative aside from the one that already exists.

Source: PiperJaffray

In terms of user metrics though, Instagram continues to win mindshare among the younger demographics. As of the most recent PiperJaffray Spring survey, Instagram edged out Snapchat as the most popular platform with 84% of teenagers using the app versus 81% for Snapchat. Meanwhile Facebook continues to trend lower among teenagers with 44% reporting that they use the app in the Spring 2019 survey versus 53% from Spring 2018 survey (7 percentage point drop in usage from a year ago among the teenage demographic for Facebook).

Hence, the growth thesis in terms of users and on platform engagement has shifted to Instagram as opposed to Facebook. Not to mention, aggressive monetization tied to Instagram stories and the introduction of conversion-based bidding, and lower pricing in general tied to Instagram Stories (due to the heightened engagement/usage of Stories) has been additive to revenue.

Facebook’s growth narrative could improve, but the optics on growth is really Instagram dependent as it provides the bulk of the new ad inventory growth at present. Rather than emphasizing the potential channels to increase advertiser activity, Facebook needs to do whatever possible to keep the growth and engagement levels high on Instagram.

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Disclosure: The author has no position in Facebook stock.

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