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Another Reason Facebook Inc's Instagram Is Poised to Explode

By Tim Brugger – Jan 27, 2016 at 2:24PM

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The social media king’s photo-sharing property is already a hit with advertisers, and investors haven’t seen anything yet.

The growth of Instagram has been spectacular since it came on line in October 2010. What was a neat little site for users to share their favorite photos took off after Facebook (META 1.80%) spent what was then considered the staggering sum of $1 billion to acquire Instagram. With Facebook's Q4 and 2015 annual earnings on tap today, some are predicting that Instagram will contribute significantly to Facebook's results, and even bigger things are expected going forward.

Why all the excitement? Not only is Instagram growing its user base by leaps and bounds -- it surpassed the 400 million monthly active user (MAU) plateau a quarter ago, with 500 million imminent -- but digital advertisers absolutely love Instagram. According to some new data, not only are marketers flocking to Instagram in droves, once they're onboard, they can't seem to get enough of "Instagrammers" -- and that translates to revenue.

Image courtesy of Instagram.

Just the facts
Like Facebook, Instagram's MAU growth, along with its highly engaged users, are a combination that advertisers can't seem to resist. Twitter (TWTR 1.29%) knows firsthand how difficult it is to bring on new, highly engaged users, as evidenced by Q3's anemic sequential growth of a mere 3 million MAUs. Twitter CEO Jack Dorsey's recent management upheaval (four top executives are out), along with its plummeting stock price, are prime examples of what can happen when growth stalls. Instagram has no such problem.

A study was conducted by L2 Think Tank in which 80 different brands were tracked to determine not only which social media sites they were using, but how many times each marketer posts content on its medium of choice. Of the four social-media platforms tracked, Instagram was the cream of the crop for brand activity.

In the study, more than 78% of the brands with Instagram accounts posted content on Instagram each day. Somewhat surprisingly, at least at first glance, Twitter wasn't far behind, with 74.6% of the brands posting a tweet on a daily basis. Nearly two-thirds of the brands tracked posted on Facebook each day, an impressive figure given its 1.55 billion MAUs. Snapchat trailed in this ranking with 16% posting daily.

Neither Instagram nor Twitter share ad rates, but considering the former's 400 million MAUs, and strong user-engagement levels, it wouldn't be surprising if there is already a disparity between what each site is able to charge for spots. And that difference should continue to grow thanks to advertisers' love of Instagram.

And there's more
It has only been a few months since Facebook CEO Mark Zuckerberg finally opened Instagram up to the marketing masses, but the pace of adoption by advertisers has been astounding. As per data from Brand Networks, there were 100 million ad impressions in September of last year -- twice that of the previous month. That total grew to more than 650 million by December, and Brand Networks expects ad impressions to hit 1 billion in a couple of months.

Instagram's photo-rich site is a natural for advertisers' video campaigns, and they clearly recognize that. Video spots are growing on Instagram much faster than industry pundits expected. Of the ad impressions tracked over Cyber Monday, a mind-boggling 92% were videos. Not only is the volume of videos impressive, but they tend to be higher-priced spots than traditional banner ads, boosting Instagram's revenue. Already, pundits are forecasting Instagram to add appreciably to Facebook's top line.

After just a quarter of becoming fully monetized, Instagram is expected to add about $730 million in revenue in Q4. Should the rapid growth of Instagram's ad sales meet forecasts, it would generate more than $3 billion in 2016, and that could rise to as much as $5.3 billion next year. To put Instagram's estimated results into perspective, Twitter reported $569 million in sales last quarter, and forecast Q4 revenue of around $700 million.

The impact of Instagram on Facebook's financials going forward could prove to be game-changing. Brands love the site, Instagram is ideal for high-cost video spots, and it's growing MAUs at an amazing clip. Instagram is poised to have a breakout year in 2016, which is good news for Facebook investors. The better news is that Instagram is just scratching the surface of its potential.

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. 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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