Instagram had passed Twitter (NYSE:TWTR) in terms of total users by the end of 2014. But it wasn't until over a year later that Instagram counted more advertisers on its platform. That's largely due to the fact that Instagram didn't open its advertising products to everyone until late last year.
While Facebook (NASDAQ:FB) doesn't break out revenue from Instagram, it's quite possible that the photo-sharing app could surpass Twitter's ad revenue as soon as this year. Some analysts are estimating the app will bring in over $2 billion in revenue by the end of 2016, and Credit Suisse believes it could bring in $3.2 billion. By comparison, Twitter is expected to generate around $2.7 billion in total revenue, according to the consensus analyst estimate. Twitter historically generates about 90% of revenue from ads, which would be about $2.4 billion.
How Instagram will pass Twitter
Instagram now has 500 million users and it's growing faster than ever. Cowen and Co. analyst John Blackledge says the app is adding 366,000 new users per day, compared to 350,000 users per day back when it had between 300 million and 400 million users.
Twitter's user growth, by comparison, has stalled out around 320 million. The app even lost users in the U.S. during the fourth quarter, when it exhibited no user growth globally.
Plus, Instagram has around 100 million U.S. users while Twitter has just 65 million. The U.S. is generally the most valuable market for advertisers, and Facebook monetized U.S. users at a rate 3.75 times higher than its global average.
On top of that, Instagram has more than double the number of daily active users (DAUs) of Twitter. Instagram says 300 million of its users access the app daily. While Twitter doesn't report its daily active users, its last update was that 44% of its monthly users logged in on a daily basis as of the second quarter last year. That would put it's DAUs around 141 million, which is in line with analyst estimates. With more than twice as many users logging in every day, Instagram only has to monetize them at half the rate of Twitter to produce higher ad revenue.
The current state of Instagram advertising
It's still very early going for advertisers on Instagram, and in the first couple of quarters most of the ad spend on the photo-sharing app cannibalized spend on Facebook, according to data collected by William Blair analyst Ralph Schackart.
In the fourth quarter, Instagram ad spend accounted for 3% to 7% of Facebook's total ad revenue, according to "industry contacts." That implies that Instagram was already at a $1 billion run rate in the fourth quarter when its parent company generated $5.6 billion in ad revenue.
As Instagram continues to ramp up advertising, and more advertisers come on board, and more users join the network, Instagram will surely surpass Twitter's ad revenue. Whether it can do that by the end of the year remains to be seen, but given the trends at both companies, it's not out of the question.
Going forward, Schackart said his source believes Instagram advertising will be largely incremental now that marketers have gotten their bearings. If it does indeed surpass Twitter this year and produce around $2.5 billion in ad revenue, that would be around 10% of what analysts are currently expecting Facebook to bring in this year. Not bad for its first full year of monetization.
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.