After building out various e-commerce features in recent years, Facebook's (NASDAQ:FB) Instagram subsidiary is ready to start making some sales. Instagram rolled out a direct checkout functionality last month, allowing users to seamlessly complete transactions within the app. Previously, Instagrammers were redirected to outside sites to make purchases. Instagram has said that 130 million of its monthly active users (MAUs) tap on the product tags that identify items that are for sale.

Within a matter of years, Instagram shopping could be a $10 billion business.

Instagram checkout interface displayed on three smartphones

Image source: Instagram.

Word on the Street

That's according to Deutsche Bank analysts (via CNBC), who recently put out a research note estimating that the new checkout feature could generate $10 billion in revenue for Facebook in 2021. Analyst Lloyd Walmsley argues that the checkout feature, which started rolling out last week, is "a key step toward unlocking this opportunity." Initially, the checkout feature is only available to nearly two dozen brands, but Instagram intends to roll it out more broadly after testing it.

The e-commerce functionalities are an obvious and complementary extension of the existing ad business, improving conversions and the return on investment (ROI) that advertisers can generate. Instagram can also leverage a user's purchase history to improve ad targeting, which in turn could generate more product sales, creating a virtuous cycle.

The platform, which may potentially soon be rebranded "Instagram from Facebook," offers merchants and small businesses a new distribution channel, although in return they will have to cede control of the customer relationship and user data, as Instagram will sit between merchant and buyer as a middleman. Instagram has confirmed that it is taking a cut of sales, charging participating merchants a small "selling fee" without publicly elaborating how much this fee is.

Instagram is Facebook's growth driver

Meanwhile, the core ad business on Instagram is expected to bring in a whopping $14 billion in revenue this year, according to recent estimates from Jefferies. That would be up from the $8 billion to $9 billion in ad revenue the popular photo- and video-sharing service generated in 2018. That estimate for 2019 could potentially represent 20% of Facebook's total revenue for the year. Much of Facebook's growth is now being driven by Instagram, which was largely able to avoid negative publicity associated with its parent company's string of privacy scandals over the past two years. (That also makes the idea of adding Facebook branding to Instagram somewhat questionable.)

Other estimates have previously pegged the value of the Instagram subsidiary at $100 billion, quite a return on the $1 billion that Facebook originally paid way back in 2012. As Instagram continues to ramp monetization under new chief Adam Mosseri, who Walmsley believes is more concerned with monetizing the service, that valuation estimate could even prove conservative over time.