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Facebook's Instagram Is Growing This Key Metric

By Jamal Carnette, CFA – Sep 22, 2016 at 8:16PM

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The photo-sharing site is growing its real customers at a rapid clip.

Image source: Facebook/Instagram

Social-media has a nontraditional business model. Apple (AAPL -0.34%) CEO Tim Cook once quipped, "If a service is free, you're not the customer -- you're the product." He's right. Although traditional accounting and financial reporting doesn't acknowledge this fact, the greatest asset Facebook (META 2.53%) has is its 1.71 billion users that access the site monthly.

The site's real, paying customers are the advertisers vying to market to Facebook's users. And Facebook's combination of large user base and refined data collection makes the site a goldmine for perspective marketers. A recent eMarketer survey found the company commanded 30% of total digital display ad revenue last year, up from 25% in 2014. In its annual report, Facebook credited its 49% year-over-year advertising growth to a combination of user growth, demand for ads, and greater ad placement (or ad load).

One particular area of growth going forward is the company's Instagram purchase. A recent blog post outlines why Instagram may be a large factor in Facebook's growth going forward.

Instagram has half a million advertisers

After years of restraint, it seems like Facebook CEO Mark Zuckerberg and company are now looking to shift marketing on the photo-sharing site into high gear. Nearly a year ago to the day the company announced Instagram advertising was available for marketers -- Instagram now has 500,000 advertisers. Facebook wisely added the ability for advertisers to buy both Instagram and Facebook ads through one interface, and that decision is now paying (figurative) dividends.

Image Source: Facebook/Instagram

For investors, it's encouraging to see Instagram is not slowing down in its quest to add new marketers. The last advertiser-related update Facebook provided for Instagram was in February. The update said that the smaller site had 200,000 advertisers. In approximately seven months the company has added 150% more brands looking to reach its Instagram audience.

Instagram should play a big role in Facebook's future growth

Looking forward, Instagram is slated to play an even bigger role in the company's financial performance. Facebook relies on three key drivers for advertising revenue growth: increases in user growth and engagement, higher per-ad costs, and heavier ad loads.

Unlike its eponymous site, Facebook does not release Instagram metrics every quarterly report, instead choosing to announce major user milestones on its public relations sites. In June the company announced it had 500 million users, adding 100 million users, or 25%, in approximately 10 months.  As Instagram continues to grow users at a faster clip than Facebook, advertisers will naturally chase eyeballs by posting ads on the site. The combination of increased users and marketer demand should converge to show up on Facebook's income statement.

Additionally, it seems Instagram may be able to increase the amount of marketing on the site. Last quarter Facebook CFO David Wehner noted ad load on Facebook was higher than it was two years ago. Growing ad revenue through increased ad load is difficult due to the fact that users do not come to the site to wade through a never-ending stream of ads. Wehner and Facebook understand this by noting, "[increased] ad load will be a less-significant factor driving overall growth, especially after mid-2017."

Wehner did note Instagram has a lower ad load than Facebook, which should allow the company to increase marketing attempts on the site in addition to the aforementioned growth in users and marketers. Instagram could be a major factor in Facebook's top-line growth in the years to come and it would be looked upon favorably by the analyst community if the company reported Instagram's results in its financial statements.

Jamal Carnette owns shares of Apple and Facebook. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.

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