Instagram is growing faster than ever, and its ad business is set to perform exceptionally well in 2017. At the beginning of the year, Facebook (NASDAQ:FB) announced the photo-sharing network reached 400 million daily active users. Last month, Instagram said it reached 1 million active advertisers on its platform.
Revenue expectations are fairly high for 2017. eMarketer expects Instagram to generate $2.8 billion, and some analysts expect it to earn even more. Facebook doesn’t break out the actual revenue numbers for the app. Piper Jaffray’s Samuel Kemp thinks Instagram still has a ton of growth ahead of it. He’s predicting $22 billion in revenue by 2021. A lot of that revenue, he says, will come from stealing away Snapchat’s audience.
The clone wars
Instagram has unabashedly copied Snap‘s (NYSE:SNAP) best innovations in Snapchat. It started with Stories last August and more recently aped the core disappearing photo feature in its direct messaging product.
Instagram recently announced Stories surpassed 200 million daily active users. That’s more than the 161 million users that logged into Snapchat on an average day in December. It’s important to note Instagram’s phenomenal growth has come at the same time Snapchat’s growth stalled. Snapchat’s daily user count increased just 13 million from June.
It’s also worth noting that there’s significant overlap in users of Snapchat and Instagram. Ninety percent of Snapchat users also use Instagram. Kemp believes that means if Instagram continues to copy Snapchat’s features, those users will have fewer reasons to use Snapchat. As such, Instagram should see increased engagement rates while Snapchat engagement falls.
A surge in revenue growth
Analysts are predicting huge revenue growth in the coming years for Snapchat. Many analysts have the company reaching $1 billion in sales this year and $2 billion next year. That’s predicated on a few factors, mainly user growth, increases in ad load, and increases in ad prices. None of those actually operate independently. Demand is a major factor that influences both ad prices and ad load. User growth is a major factor in generating demand.
So a lot of Snap’s potential revenue growth relies on it increasing Snapchat users as quickly as analysts anticipate. JPMorgan analysts expect 299 million daily users by 2020 and Cowen expects 378 million by 2022. If Instagram slows down Snapchat’s user growth and Snap cannot meet those expectations, it’s likely revenue will fall short of expectations as well. Instagram will be there to win those lost ad dollars.
Still, even the rosiest outlooks for Snap don’t have the company generating anywhere near $22 billion. Besides, it’s not like Instagram will take 100% of Snapchat’s revenue. So where will the rest of Instagram’s revenue growth come from?
Instagram’s biggest advantage over Snapchat is that on top of the friend-to-friend interactions in the app, users are also interacting with brands. In fact, Instagram is how teens prefer brands reach out to them to introduce new products and promotions, well ahead of parent company Facebook and Snapchat, according to Piper Jaffray’s “Taking Stock With Teens” survey. As such, Instagram ads ought to convert at a higher rate, garnering higher prices.
It’s the combination of personal bi-directional communication and influencer one-to-many communcation found on Instagram that makes it so valuable. It means users will spend a lot of time in the app, and they’re open to seeing content from brands, too. In Snapchat, users are more interested in connecting with friends, and many ignore most branded content.
Revenue of $22 billion by 2021 is quite a bold prediction. For reference, all of Facebook generated $27 billion last year. To expect Instagram alone to nearly double Facebook’s revenue in four years may be a bit too optimistic. Nonetheless, Instagram is poised to see substantial revenue growth and it should play a big role in Facebook’s revenue growth over the next few years.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.
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