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Facebook: Instagram and Video Will Drive Future Growth

By Ishfaque Faruk - Feb 4, 2014 at 11:00AM

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Facebook is very well-positioned on mobile, and the company’s user base is more active on mobile devices as well. Facebook has more growth drivers in the future and can derive immense benefit from Instagram and video ads.

Facebook (META 5.64%) has done very well and generated strong returns for shareholders in the last year. The company saw revenue growth accelerate in 2013 due to a big improvement in its ability to monetize mobile users. Facebook is trading near all-time highs, and still has more growth room due to two new revenue drivers for the company, that can generate substantial amounts of revenue for the social media company. Online video advertising and Instagram will propel Facebook's top-line growth in the near-to-medium term.

Instagram monetization
The company's Instagram acquisition has been a great move and is starting to pay big dividends for Facebook. The popular photo-sharing network now has more 180 million MAUs. Instagram rolled out Instagram Direct, which enables users to send private photos and messages, giving more utility to end users by allowing them to choose the users with whom they want to share information.

Instagram's video usage increased after the company enabled users to upload videos in 2013. The company has now started to monetize the popular photo-sharing network with selective ads from leading brand marketers by carefully focusing on very creative, photogenic impressions. 

Facebook ended 2013 with 945 million monthly mobile users, and as a result, the addressable market for Instagram is much larger than its current level of less than 200 million users. In Q4 2013, Facebook's average revenue per user, or ARPU, from mobile users stood at $1.31, and even if Instagram can achieve an ARPU of $0.75 in a quarter based on its 180 million users, the photo-sharing platform can generate $540 million in annual revenue.

Under more optimistic scenarios, Instagram can generate annual revenue close to $1 billion dollars. In the future, Instagram could easily be a major revenue generator for the company.

Online video ads can generate $1 billion annually
Facebook rolled out video for its user base in late 2013, and the company is widely expected to roll-out video ads for advertising. The company's huge data sets about consumers, along with daily visitors of more than 750 million, make it the holy grail of advertising. 

The company's advertisers will soon be able to use the video format to target desired demographic groups. These video advertising dollars will be largely incremental and attract newer advertisers, both of which will give Facebook's revenue a big boost.  

Facebook's No. 1 online advertising competitor, Google (GOOGL 2.60%), is the champion of online video ads through its YouTube subsidiary. YouTube has become a favorite of video advertisers after it launched the TrueView ad format, which allows consumers to skip ads they don't want to watch. Google doesn't break out YouTube's revenue as a separate line item in its financials, but estimates stand at roughly $5.6 billion in gross revenue in 2013. After paying content creators, Google earns around $1.96 billion in net revenue, according to eMarketer. 

Facebook has a bigger monthly user base compared to YouTube's 1 billion monthly users. The U.S. TV advertising market is expected to grow to about $82 billion in 2017, up from $64 billion in 2012, according to PricewaterhouseCoopers. The online video advertising market in the U.S. is expected to grow from $4.14 billion in 2013 to roughly $9.06 billion in 2017, according to eMarketer. With a large and engaged user base, Facebook can earn $1 billion in annual revenue from online video ads, considering the opportunity to place video ads on both Facebook and Instagram.

Going forward
Facebook remains an expensive stock, but the company's revenue growth acceleration in 2013 has been a major positive. The company is doing a number of things right -- growing its user base, focusing more on mobile ads, and investing in product development.  

The company's earnings per share, free cash flow, and average revenue per users had seen big year-over-year increases in 2013. These metrics will continue to derive immense benefit from the company's ability to monetize its increasingly large audience on Instagram, and earn video advertising dollars from big marketers. Both of these future growth drivers will yield a big upside for Facebook's revenue and earnings.

Ishfaque Faruk owns shares of Facebook. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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.

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