Snapchat might have invented the stories format, but Facebook (META -0.81%) is making the most of it.
The company now known as Snap (SNAP -4.40%) introduced Stories -- slideshows of images and videos that disappear after 24 hours -- way back in 2013. It took Facebook until 2016 to realize it was an actual thing, and it quickly grew multiple products to become larger than Snapchat's Stories.
"Instagram was the first to really take off here," Mark Zuckerberg said on the company's first-quarter earnings call. "Facebook started slower but is now growing quickly too. And WhatsApp Status is by far the biggest of these products and continues to grow quickly."
The company would later reveal that WhatsApp Status has 450 million daily users on the same day Snap reported earnings, no less. Most recently, it told TechCrunch that Facebook Stories has 150 million daily users.
For reference, Snapchat has 191 million daily users as of the end of the first quarter, it's growing more slowly than all of Facebook's products, and leaked data revealed it had fewer than 150 million daily Stories users as of mid-September last year.
Importantly for investors, Facebook is going to start showing ads in Facebook Stories, something it's already been experimenting with in Instagram Stories since early last year.
An opportunity and a challenge
At the beginning of the year, Zuckerberg said he expects Stories to become more popular than feed posts. Chief Product Officer Chris Cox showed some data at Facebook's recent developers conference indicating that Stories is on pace to surpass feed posts sometime next year.
That's both an opportunity and a challenge for Facebook.
The good news is Facebook has quickly become the leader in the stories format. The bad news is it has a huge advertising business selling ads in feeds.
That means Facebook needs to make ads in Stories just as good, if not better, than ads in its feeds. "If we don't do this well, then as more sharing shifts to Stories, that could hurt our business," Zuckerberg told analysts. "But there's upside, real upside here too, if we do a good job."
Indeed, stories ads offer some compelling advantages over ads in news feed or the Instagram feed. Most importantly, they take up the entire screen and command the user's entire focus. But it's still unclear how users will respond to ads in stories and whether Facebook can show as many ads in the format as it does in feeds.
The move comes at a time when Facebook faces pressure on its ad inventory growth. CFO Dave Wehner warned investors of ad load saturation starting in mid-2016, and over the last three quarters, ad impression growth lagged user growth. Opening up ad inventory in stories could offset some of that pressure, which would reduce the need to rely on higher average ad prices to grow ad revenue.
Cutting into Snap's ad sales
Snap has largely disappointed investors with its earnings results since going public, with analysts repeatedly lowering their expectations for revenue growth. Analysts now expect Snap to bring in $1.19 billion in revenue for 2018, which is close to the expectations they had for its 2017 revenue before the company went public a little more than a year ago.
Opening ad inventory in Facebook Stories and continuing to expand ad sales for Instagram Stories could weigh on Snap's revenue growth going forward. Not only do both products offer potentially broader reach than Snapchat's Stories product, but they benefit from Facebook's superior ad targeting data.
Simply put, the return on investment for advertisers is likely better on Facebook's stories products than Snapchat Stories. And with a finite budget with which to experiment with the format, marketers are more likely to buy Facebook's ads because of the better ROI. And those Facebook ad purchases come at the expense of Snap Ads.
What's more, Facebook's just getting started with ads in stories. It hasn't even touched WhatsApp Status, which has three times as many users as Facebook Stories. And it's shown an ability to grow a stories product even while showing ads; it started monetizing Instagram Stories with 150 million users, and it now has 300 million. Less than 10% of Facebook's monthly active users currently view a story on any given day. That's a lot of runway for growth, and a lot of pressure on Snap.