Facebook (FB) did something yesterday that could mean an additional $2.1 billion in revenue — just this year. It’s no wonder shares are rallying in the stock market today.
How on earth could Facebook essentially pull $2 billion from thin air? Two words: Instagram ads.
Facebook, which owns Instagram, hasn’t really monetized the young site yet, using the ad-free nature of the platform to attract users and keep them engaged. But now it’s time to monetize that userbase — and given Instagram’s 300 million monthly active users, that userbase is a goldmine.
Boy, now sure is a good time to own FB stock.
History
Facebook bought Instagram, a popular photo-sharing social media site, for $1 billion back in 2012. At the time, the site had 27 million users, and it was uncertain just how FB would utilize the property.
In the three years since, we’ve seen the strategy Facebook CEO Mark Zuckerberg had in mind play out, and I must say, he played it brilliantly.
After the 2012 Instagram purchase, Facebook basically just subsidized Instagram, which has stayed largely ad-free intentionally, hoping to attract and keep users who might otherwise not stick if advertising were prominent. If the strategy sounds familiar, that’s because it’s exactly what FB did itself.
The strategy played out brilliantly again, and Instagram is now the fastest-growing social media site on the planet, boasting more than 300 million monthly active users.
More Advertisers, Click-to-Buy Button, Hyper-Targeting
Now it’s time for Instagram to start pulling its own weight. The site unveiled a three-tiered advertising initiative yesterday, which RBC Capital Markets believes could drive between $1.3 billion and $2.1 billion in revenue this year alone. FB stock responded appropriately, jumping 2% on the news.
Here are the three features of Instagram’s new ad program:
1. You will now be able to purchase some products directly through advertisements.
This is an advertiser’s dream — giving the consumer the ability to make an instant, impulse purchase the second their ad is seen. Advertisers obviously win with the feature, which also streamlines the consumer experience. And of course FB will be taking a healthy bounty for each sale it generates.
2. Instagram will use Facebook data to better target ads
Surprise, surprise, advertisers also like more precise targeting methods. That’s the primary reason Google (GOOG, GOOGL) has been so dominant for so long: Advertisers can target warm leads — people who already potentially want to buy whatever wares the advertiser’s hawking.
Instagram isn’t a search engine, of course, but it’s still a great tool for targeted advertising. And it just got better. From Instagram’s announcement:
“Working with Facebook, we will enable advertisers to reach people on Instagram based on demographics and interests, as well as information businesses have about their own customers.”
That’s right. FB is putting its famous trove of data to use with Instagram as well.
3. Instagram Opens to ALL Advertisers
Big, small or average, Instagram is opening up the playing field, allowing businesses of all kinds to advertise on its site. Joe’s Widget Shop will now have the same opportunities to advertise as Coca-Cola (KO). Again, FB will support these efforts with its own infrastructure:
“To give all businesses the opportunity to reach the right people, we are working to make Instagram advertising available through an Instagram Ads API and Facebook ad buying interfaces over the coming months”
Bottom Line
Instagram ads could, frankly speaking, be a game-changer for FB stock. Facebook gained a new revenue stream overnight, and it took out an insurance policy in case its eponymous social network somehow fades into obscurity.
Analysts say the move could be worth up to $2.1 billion for FB this year, which is significant considering Facebook revenue is expected to be $17 billion in 2015. But the long-term revenue stream will be far, far greater, as Instagram will now be able to monetize in perpetuity.
This isn’t the only thing going for FB stock, but it’s a major positive. I’ve said it before and I’ll say it again: Facebook is still a screaming buy.
Twitter (TWTR), you’ve got some catching up to do.
As of this writing, John Divine owned shares of GOOG stock and GOOGL stock, stocks he also views as strong buys. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
