Improved Instagram Could Be Game-Changing for Facebook Stock
A quarter ago, Facebook (NASDAQ:FB) warned its investors that the future may not look as bright as the past. Namely, between a dented reputation, market saturation and improving competition from the likes of Snap (NYSE:SNAP) and Twitter (NYSE:TWTR), its revenue growth pace was poised to slump and margins were apt to shrink. Facebook stock immediately plunged 20% and is now 30% below the pre-warning price.
There’s a glimmer of hope shining in the distance, though… maybe. Facebook is finally going to turn up the heat on the monetization of its Instagram platform.
Will it work? Sure. The question is: will it work well enough to return Facebook’s glory days of growth, and when might that happen?
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Here Comes the Ads
If it seems like there are a few more Instagram stories of late, you’re not imagining things. There are. Chief among them is the replacement of the company’s now-former CEO Kevin Systrom with Facebook insider Adam Mosseri, though the exit of Instagram co-founder Mike Krieger is just as noteworthy. Though their exit appeared amicable, Systrom recently acknowledged his resignation wasn’t exactly his choice.
Why would Facebook let the integral pair walk away? Speculation on the matter has abounded, but the most obvious answer is also the most correct one — Facebook CEO Mark Zuckerberg wants a bigger, better bottom line from his 2012 acquisition.
The first item on the checklist: More — and more fruitful — ads popping up in the middle of Instagram chats, starting with the “Stories” feature; Stories is a pretty blatant ripoff of Snapchat’s shtick.
What this will look like still isn’t entirely clear, as most consumer-oriented outfits are forever tweaking their product. But many onlookers are worried that Facebook will make the mistake of overreach. One Instagram advertiser opined, “I think, historically, Instagram would have [prioritized] the user experience, but the pressure will be on to [monetize].”
Facebook isn’t unaware of that risk either.
Carolyn Everson, Facebook’s vice president of global marketing solutions, recently explained: “We have every incentive, in our bones, to have Instagram have a unique value proposition and not have it just become a replica of Facebook. That would completely destroy its value, and so that’s completely the opposite of what we intend to do.”
Nevertheless, sweeping changes remain in the queue. A feature called “school communities” will let students attending the same college connect with one another, “Nametag” will turn a profile into a QR code. Other improvements and additions are just a thought away.
Make no mistake, though: the end goal is to draw a bigger crowd that ultimately leads to more ad revenue. The line between decent profits and overwhelming exposure to advertising is a fine one, though, and few companies have been able to consistently walk it.
On the other hand, the math thus far seems to add up.
Crunching the Numbers
Facebook desperately needs whatever it does with Instagram to pay off — and fairly soon. The good news is, it likely will… at least initially.
Facebook doesn’t offer up a great deal of detail about where its revenue comes from. KeyBanc Capital Markets analyst Andy Hargreaves offered up some estimates, however, and believes roughly 15%, or $2 billion of the previous quarter’s $13 billion worth of advertising revenue was supplied directly by Instagram.
That’s not much, even If Instagram grows great guns from here. Current and would-be owners of Facebook stock may not fully appreciate just how much growth may be in the cards, though. Hargreaves believes Instagram could account for roughly a third of Facebook’s ad business within a couple of years, translating into 70% of Facebook’s revenue growth for that timeframe.
It’s not a difficult projection to embrace, given the decided success some advertisers have already seen with Instagram compared to Facebook as an advertising medium. Its per-click prices are falling, and consumer responses are more fruitful than Facebook’s for many companies using the relatively young platform. Marketing Land and Search Engine Land reported in July that ad spending at Instagram grew 177% year over year in the second quarter, while Facebook’s take was essentially flat.
There’s a reason advertisers are choosing Instagram over Facebook.
Bottom Line for Facebook Stock
It remains to be seen exactly how long it will take Instagram to be an integral part of how investors value Facebook stock, though it’s not apt to be a major factor in the immediate future. It’s also apt to make a gradually bigger contribution to the bottom line. It could be a couple of years before it matters; traders looking for immediate relief may not want to hold their breath.
Assuming the company treats the increased monetization of Instagram wisely, though, without committing the same kinds of unforced errors Snapchat stumbled into making, the platform could become the eventual breadwinner for a beleaguered Facebook.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
More From InvestorPlace
The post Improved Instagram Could Be Game-Changing for Facebook Stock appeared first on InvestorPlace.
