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Facebook Inc: Instagram Is the Next Big Catalyst for FB Stock

After topping 500 million users, Instagram is Facebook's greatest growth engine

Facebook stock - Facebook Inc: Instagram Is the Next Big Catalyst for FB Stock

Source: SilverIsdead Via Flickr

If scoffs were audible, then a collective one could be heard emanating from Wall Street on April 9, 2012. That’s the day Facebook Inc (FB) bought the promising-but-profitless photo-sharing application Instagram for a staggering $1 billion. A month later, Facebook stock debuted on the Nasdaq. Things, um … didn’t go well.

Facebook Inc: Instagram Is the Next Big Catalyst for FB Stock

Fast-forward just over four years, and Facebook stock is the toast of Wall Street, and Instagram has emerged as its next great growth driver.

Instagram Growing Faster Than Facebook

Instagram just topped 500 million users, double the number it had just two years ago and five times more than it had little more than three years ago. On average, Instagram is adding 100 million users every nine months. Of its 500 million users, 300 million of them use Instagram on a daily basis — equaling the number of daily active users at Twitter Inc (TWTR), and twice as many as Snapchat!

With its user numbers skyrocketing, Instagram has seamlessly incorporated advertising — marketing messages that pop-up between the photos. About 200,000 advertisers pay good money for those spots. And the results are a potential game changer for Facebook.

According to eMarketer, Instagram will generate $1.5 billion in ad revenue this year, which would be a 144% year-over-year increase from 2015. If true, the $1.5 billion in Instagram sales would represent 8.4% of Facebook’s total projected 2016 sales.

By 2018, that number is expected to rise to 18%. In other words, Instagram is becoming a much bigger slice of the Facebook pie. Suddenly, the $1 billion Facebook paid for Instagram looks like a pittance.

Facebook’s user numbers aren’t exactly stagnating — global active monthly users improved nearly 15% in the first quarter — but they’re no match for Instagram’s growth. And that brings us to Facebook stock.

FB shares have been stuck in a rut since hitting a new high above $120 in early May. FB sank as low as $113 two weeks ago — falling below its 50-day moving average for the first time since April — before showing a few signs of life last week. All told, Facebook stock has scarcely budged since the beginning of February.

So, the Instagram news, released on Tuesday, comes at a welcome time for FB. It hasn’t moved the needle much yet — the stock got only a small bounce the day the news was released — but if the sales projections are true, Instagram could be Facebook’s next great growth driver, and a major catalyst behind the next big move in Facebook stock.

Bottom Line on Facebook Stock

When investment neophytes always ask me what stocks they should invest in for the long-term, Facebook is invariably one of my first answers. FB is a buy at any price point, but after being knocked backward these last few weeks, this is an especially good entry point for Facebook stock.

If Instagram delivers on its growth projections, it could be a great entry point.

At the very least, no one on Wall Street is scoffing at Facebook’s Instagram strategy anymore.

As of this writing, Chris Fraley did not a hold a position in any of the aforementioned securities.

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