Mark Zuckerberg knows a few things about trends in social media. He acquired Instagram when it was still in its infancy, and he attempted to buy Snapchat when it was still relatively small. Facebook (NASDAQ:FB) has also successfully copied features and formats from other apps, such as hashtags and Stories.
So when Zuckerberg said on on Facebook's fourth-quarter earnings call that, "Stories are on track to overtake posts in feeds as the most common way that people share across all social apps," my ears perked up. In fact, Stories -- user-generated photo or video collections that disappear after 24 hours -- have become so popular that Zuckerberg said it "will have an impact on how we build products and think about our business."
The growth of Stories presents yet another opportunity for Facebook.
Stories is under-monetized
Stories is most popular in Instagram and WhatsApp, which each have over 300 million daily active users for the feature. By comparison, Snap's (NYSE:SNAP) Snapchat has just 178 million daily users as of the end of the third quarter, and about 140 million people use Snapchat Stories on a daily basis. Facebook Stories -- which are displayed across the Facebook app and Messenger -- has another 70 million daily users.
But the Stories format -- on both Facebook's and Snap's apps -- remains relatively under-monetized. Facebook stands to benefit from the same ad features Snap has been touting for a few years now: "It's full screen, it's authentic, and it's very engaging," Facebook COO Sheryl Sandberg said.
Snap's success selling Snap Ads, however, has been limited. After opening up its self-serve ad platform, Snap saw tepid demand for its ad products resulting in a decline in average ad prices. Most advertisers that have tried Snap Ads find it an ineffective use of their budgets, according to a recent eMarketer survey.
But Snap's struggles may be tied more closely to its relatively poor targeting capabilities, not to the ad format itself. Facebook, by comparison, has some of the best targeting and measuring capabilities in the world. Combining those capabilities with the new Stories ad format will be "really powerful in the business of our clients," Sandberg said.
Expecting modest ad impression growth
It's been a year and half since Facebook CFO Dave Wehner warned that ad revenue growth will slow down now that it's reached ad load saturation in its news feed. Again, he forecasted that ad impressions will grow "at a modest pace" in 2018. To his credit, the growth in ad impressions has slowed significantly, dropping to just 4% growth year over year in the fourth quarter.
But Sandberg's commentary that ads in Stories remain "a small but quickly growing part of our revenue" implies there's a lot of room to ramp up ads in Stories. That could result in ad impressions growth that starts to outpace user growth once again at some point in the future. That's especially true considering Zuckerberg's commentary that Stories will be a more common way of sharing than feed posts this year and that it will affect how management thinks about the business.
Instagram is still relatively nascent in its journey toward becoming yet another ad revenue machine for Facebook. It currently counts 2 million active advertisers, compared with Facebook's 6 million. But Facebook's ad buying platform is set up to funnel advertisers on Facebook onto Instagram, so it's only a matter of time before that gap gets a lot smaller. And while Instagram counts just 800 million monthly active users compared with Facebook's 2.1 billion, Instagram is growing quickly.
Meanwhile, Facebook is just reaching the very early stages of monetization in WhatsApp. The popularity of Stories in that app -- which has 1.5 billion monthly active users -- could bring a ton of businesses into the WhatsApp ecosystem, opening further revenue opportunities beyond advertising for the messaging app.
Changes to news feed could put some pressure on ad impressions, but management expects the impact to be modest, if not negligible. Facebook will be able to offset any impact from the changes with growth in Stories ads. And considering the high potential value they can deliver thanks to Facebook's targeting and measurement tools, it should help keep average ad prices elevated as well.