Global Launch of Instagram Reels Makes Facebook a Buy

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According to an NBC news report, Facebook (NASDAQ:FB) is set to launch its TikTok clone – Instagram Reels – in the U.S. and globally in a matter of weeks. Make no mistake. This is big news. The global launch of Instagram Reels is a big reason to buy FB stock today.

FB Stock Will Power Through Short-Term Headwinds
Source: rvlsoft / Shutterstock.com

The rationale is simple. TikTok has quickly turned into the world’s hottest app amid the novel coronavirus pandemic, mostly for its ability to quickly entertain audiences with short, 15-second, easy-to-consume video clips. That app, however, is coming under increasing scrutiny because its parent company, ByteDance, is based in China, where data privacy is not up to the same par as it is in many other countries around the globe.

Some countries have therefore banned TikTok. Many others are considering doing so. In those countries, Instagram Reels – which is literally just TikTok added to the Instagram feed – will capture all those former TikTok users and turn them into Reels users.

Meanwhile, in countries where TikTok isn’t banned, Reels will still see huge success, because the market is big enough for two players and Instagram has a proven track record of successfully turning copycat features into market dominant platforms.

Net net, the global launch of Instagram Reels lays the foundation for meaningful out-performance in FB stock over the next few years.

Here’s a deeper look.

Instagram Stories Success Story

This is not the first time Facebook has played copycat in the social media space.

Most consumers will remember when Facebook took a page out of Snap‘s (NYSE:SNAP) playbook and launched Instagram Stories. Most investors will remember that Instagram Stories was a huge success for FB stock.

Instagram Stories launched in August 2016. There was an immediate uptick in platform engagement. Facebook’s monthly active user (MAU) growth was below 15% in both the first and second quarters of 2016. Starting in the third quarter of 2016 – when Instagram Stories launched – Facebook’s MAU growth rates accelerated to 15%+ for five straight quarters, including three quarters of ~17%+ growth.

Thereafter, there was a lagged uptick in ad spending on the platform. Facebook’s average revenue per user (ARPU) and revenue growth rates were consistently slowing throughout 2016 and into the first half of 2017. Then, starting in the third quarter of 2017 – about four quarters after the launch of Instagram Stories – Facebook’s ARPU and revenue growth rates started to accelerate. In a big way. From 23% ARPU growth in the second quarter of 2017, to 30%+ ARPU growth in the first quarter of 2018.

This accelerated growth laid the groundwork for Facebook to smash revenue and earnings estimates throughout 2017 and into 2018 (before the Cambridge Analytica scandal).

During this stretch, FB stock took off. From about $125 in August 2016. To $220 in July 2018, right before the Cambridge Analytica scandal showed up negatively in the company’s second quarter 2018 earnings report.

In other words, Facebook’s last big copycat feature on Instagram – Stories – powered an immediate uptick in user growth, a lagged uptick in revenue growth, a stretch of impressive double-beat quarters and huge gains in FB stock.

Instagram Reels is Instagram Stories 2.0

FB investors would be wise to view Instagram Reels as simply Instagram Stories 2.0.

The parallels are uncanny.

Both are add-on Instagram features. Both are focused on viral, user-created short videos. And both are copying new methods for sharing content which, at the time, were in the first few innings of social media ubiquity.

Not to mention, Facebook created Instagram Stories to win users back from Snap, which at the time was stealing the youth audience. Same thing this time around. Facebook has created Instagram Reels to win users back from TikTok, which today is stealing the youth audience.

In other words, the set-up for Reels is identical to the set-up for Stories.

But that’s not why Reels will be a huge success.

It will be a huge success because size matters.

The Instagram Advantage for FB Stock

Instagram has the biggest, visual-focused, content-sharing ecosystem on the planet. The company leveraged that unparalleled ecosystem to quickly turn Stories into the world’s largest Stories platform by leaning into network effects (consumers could either share a Story on Snapchat to a limited audience, or on Instagram to a far bigger audience).

The company will similarly leverage that ecosystem to quickly turn Reels into the world’s largest short-video platform. Once again it will lean into network effects. Consumers will be able to either watch short videos on TikTok from a pool of 800 million users – and that number is at-risk of shrinking due to bans – or on Instagram from a pool that includes 2.6 billion people on one of Facebook’s apps. Inevitably, Facebook will launch Reels across all of its platforms, as the company did with Stories.

To that end, Instagram Reels reasonably projects to do over the next few years, exactly what Stories did from 2016 to 2018. Immediately supercharge engagement growth. Subsequently supercharge revenue growth. Lay the foundation for successive strong earnings reports. Push FB stock way higher.

Bottom Line on FB Stock

Don’t sleep on Instagram Reels.

This is Stories 2.0. Stories had a hugely positive impact on Facebook’s growth trajectory and FB stock between 2016 and 2018. Reels will, too, between now and 2022/23.

Expect user growth trends to tick higher. Same with revenue growth trends, profit growth trends and FB stock.

Prices closer to $300 seem entirely doable within the 6 to 12 months.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB and SNAP. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/global-launch-of-instagram-reels-makes-facebook-a-buy/.

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