Instagram
Image source: Instagram.

It took Facebook (NASDAQ:FB) eight years to reach 1 billion monthly active users. In 2014, the company purchased WhatsApp because CEO Mark Zuckerberg thought it also had the potential to reach 1 billion users. (It had 450 million at the time, and did indeed reach 1 billion users earlier this year.)

After closing the WhatsApp deal, Mark Zuckerberg made an interesting comment. "This may sound a little ridiculous to say," he told analysts on the third-quarter 2014 earnings call, "but for us, products don't really get that interesting to turn into businesses until they have about 1 billion people using them."

Yes, that's pretty ridiculous, Zuck.

What makes the comment more ridiculous is that Instagram, one of Facebook's "smaller" properties, is the most interesting business outside of Facebook's flagship platform. Despite its strong growth, it may still be some time before it reaches 1 billion users. That is, if it ever gets there.

The path to 1 billion users

Instagram's growth over the past couple years has been spectacular. The app had 200 million active users in March 2014, and today it has 500 million. Indeed, it seems to be adding 100 million more users every nine months like clockwork. That would put it on a path to reach 1 billion users within the next four years.

Research from Cowen & Co. analyst John Blackledge shows that Instagram is actually adding new users at a faster rate today than last year. Blackledge's data shows about 366,000 net adds per day compared to 350,000 per day when Instagram had 300 million users. Still, his forecast shows slowing growth over the next five years, and despite increasing his estimate recently, he doesn't see Instagram reach 1 billion users within the next five years. (His estimate comes up just short at 986 million.)

Instagram has proven just as resilient as Facebook as new social media apps have cropped up. The rise of Snapchat hasn't slowed down its user growth. The same can't be said of Twitter (NYSE:TWTR), which has seen its active user count stagnate over the past couple years. In the time Instagram added 300 million users, Twitter has added just 55 million net new users.

But it's evident that users aren't as active as they once were. Instagram says it sees 95 million photo uploads per day at 500 million users. When Instagram had 300 million users, it saw 70 million uploads. That may be the result of Snapchat becoming a place for more private photo sharing.

Does Instagram really need 1 billion users?

Even at 500 million users, Instagram is one of the biggest social media platforms and Facebook is already monetizing it. The company opened up its ads API a little less than a year ago, and it has over 200,000 active advertisers. That's more than the 130,000 on Twitter. Analysts are predicting that Instagram will bring in $1 billion to $2 billion in ad revenue this year and next year.

The early results indicate that while Instagram is generating a meaningful percentage of Facebook's revenue, it's not all incremental to Facebook. William Blair analyst Ralph Schackart has a source with one of Facebook's marketing partners that says Instagram accounted for 3% to 7% of overall Facebook ad spend in the fourth quarter, but those ad dollars came out of marketers' Facebook budgets. That means Instagram has been largely cannibalistic.

On the company's first-quarter earnings call, COO Sheryl Sandberg told analysts, "In the medium to long run, we believe we can compare very favorably with any other spend." So, while Instagram may be largely cannibalistic right now, in the long run Facebook expects the additional ad inventory from Instagram to attract ad budgets from other media. The ability to target users using the same data as Facebook ads is a major factor in that belief.

Instagram has several factors working in its favor. It's still growing the number of advertisers on its platform. Advertisers are just becoming confident in their spend on Instagram with Facebook providing valuable measurement tools to judge the last nine months of ad campaigns. And on top of that, Instagram is still adding new users.

Combining all of these factors is a recipe for a rapid increase in the amount advertisers spend on Instagram. But even without a bump in new users, Instagram stands to benefit from the first two factors. So, while it's on its way to 1 billion users, investors don't need to worry if its user growth finally starts to slow down in a couple years.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.