FB Stock Will Fly Higher As Instagram Continues To Soar: Facebook Inc. (FB)

Facebook Inc. owned Instagram now has more than 700M active users. With advertisers flocking to the photo sharing platform, Is FB stock a good buy? FB Stock Flying High As Instagram Continues To Soar Facebook Inc.
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Shares of Menlo Park, California-based Facebook (NASDAQ:FB) have been on a solid run. FB stock price stood at $146.56 at the close of the last trading session. That’s up from $115 at the beginning of the year, translating into Year-to-Date gains of 27.4%. For comparison, the Nasdaq Composite (INDEX:COMPX) is up by 11.9%, while the S&P 500 (INDEX:SPAL) is up by 6.6% over the same period, meaning Facebook stock has handsomely outperformed both of these market indices. A large part of the outperformance by FB stock can be tracked down to the performance of Instagram, the photo-sharing platform Facebook Inc. bought for $1 Billion in 2012. With Instagram firing on all cylinders, FB stock could ride this wave much much higher.

Instagram Growth Is Accelerating

Instagram now has 700M monthly active users(MAU). The photo sharing platform has doubled its user base in the last two years. While that’s an impressive feat in itself, more impressive is the fact thatInstagram MAU growth has been accelerating through this time. The Facebook-owned platform took 9 months to go from 400M to 500M, 6 months to go from 500M to 600M, and an even shorter 4 months to add the latest 100M users.

To put things in perspective, Instagram is now twice the size of Twitter, has more daily users who are using its’Stories’ feature than Snapchat’s total daily active users, and has 375M users of the Instagram Direct feature. Based on the accelerating rate at which the photo sharing platform has been adding users, Instagram could be less than a year away from joining the exclusive club of billion-user properties. The current membersof the billion-user club include Facebook, Whatsapp and Messenger, all of which are owned by Instagram parent Facebook Inc.

Instagram Is Poised To Grow Rapidly

A rapidly growing user base is just one of the many positives for Instagram. A platform with many users, but without the ‘advertisers’ will not really be a financially viable operation. The Instagram management understands this well, which is justified by the efforts the management has been taking to increase the number of advertisers on the photo-sharing platform. And well, these efforts are bearing fruit. As we had covered in one of our recent posts, Instagram has been rapidly adding advertisers on the platform. The number of advertisers on Instagram recently soared past 1M advertisers, which is up 4 times in just the last one year.

Also, as any follower of social media stocks would understand, the top line growth is a function of user growth as well as the revenue per user. In turn, revenue per user is driven by the ad prices on the platform and the number of ads shown to the users (also known as ad loads). An increasing number of advertisers will increase ad competition on the platform, which should support thegrowth of ad prices on the Instagram platform. Also, with Instagram just starting to focus on monetizing its user base, the platform has a significant runway to increase ad loads on the platform. In other words, Instagram has a number ofrevenue drivers which it can leverage to achieve a multi-year revenue growth. This rapid growth at Instagram will go a long way in offsetting a slowdown, if any, caused by stagnating ad loads on the core Facebook platform.

InstagramFinancials

As we have highlighted in repeated posts in the past, Instagram is expected to add $5.2B to facebook revenue in FY 2017, up from $3.2B last year. This is nothing short of stellar considering that Instagram started monetizing its platform only in mid-2015. However we think this could be a conservative estimate, and here is why.

Consider the core Facebook platform, which generated nearly $26.9B in advertising revenue last year. Backing out the $3.2B supposedly generated by Instagram, the core Facebook platform generated a revenue of approximately $23.69B. This was achieved on an average MAU base of 1.73B users (average of Q4 2015 end and Q4 2016 MAU numbers). That puts the ARPU on the core FB platform at around $13.7 for FY 2016. Assuming that Instagram will have an average of 700M users through FY 2017 (this will be much higher based on current growth trajectory), the platform will need to operate at just over half that ARPU ($7.43) to generate the $5.2B revenue in FY 2017. In other words, the Instagram platform could add much more than the projected $5.2B in ad dollars to Facebook’s kitty in FY 2017. This will continue to sustain overall revenue growth at Facebook, which should drive FB stock further higher.

Conclusion

Facebook-owned photo-sharing platform, Instagram, now has more than 700M MAUs. The platform has seen its user growth accelerate over the last couple of years, even as more and more advertisers flock to the platform. A growing user base, increasing ad prices (due to greater competition among advertisers) and a significant room to increase ad loads on the platform, we think Instagram’s strong revenue growth will sustain over a multi-year time frame.With Instagram set to be the Facebook’s growth engine over the next few years, FB stock will continue to fly higher as long as Instagram continues to soar.

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