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FB Stock: This Catalyst Will Drive Facebook Inc (FB) Stock Higher In 2017 And Beyond

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Instagram is clearly emerging as the next major driver for Facebook Inc (NASDAQ:FB) stock. 

– An increasing number of Wall Street Analysts are upgrading Facebook stock citing Instagram growth.

– The photo sharing platform is growing rapidly in terms of users as well as the number of advertisers.

– Will Instagram drive Facebook stock higher in 2017?

Menlo Park, California-based social networking giant, Facebook Inc (NASDAQ:FB) acquired Instagram way back in 2012, for a seemingly huge, $1B. With 30M odd users at the time, Facebook paid a value of over $33 per Instagram user at that time. That looked like big money for a platform which wasn’t generating a dollar in revenue at the time of the acquisition. However, in hindsight things look significantly different and today, Instagram looks the likely successor to take on the mantle of driving Facebook’s growth. With 600M monthly users on the platform, a number of wall street analysts have recently upgraded Facebook stock citing the growing success and popularity of Instagram. Does the Instagram growth story make FB stock a worthy buy today? Let’s dig deeper.

Wall Street Is Increasingly Bullish On Instagram

A couple of wall street analysts recently upped their outlook/price target on the Facebook stock. (See also: FB Stock: Facebook Inc Has Problems, But Then, Who Doesn’t?)

SunTrust Robinson Humphrey analyst Rodney Hull yesterday reiterated a Buy rating on Facebook shares and a $142 price target. As reported by Barrons, the SunTrust analyst models Instagram generating $1.8B in revenue this year, which will rise to $3.5B next year. The analyst thinks these numbers will help Instagram beat the current street estimates. The Suntrust analyst wrote:

The increase in user growth along with several new features to drive engagement bode well for continued strong revenue contribution, We anticipate that accelerated user growth could drive Instagram revenues higher vs. our estimates

Rodney also highlighted 5 points with respect to Instagram, which investors should focus on.

1. Re-acceleration – YoY growth increased by ~200bps since crossing the 500M MAU mark,

2. Net Adds – increased to ~17M per month from ~11M monthly net adds Instagram added for the last ~2+ years,

3. International – the percent of international users was not disclosed, and we believe investors are therefore curious where Instagram is adding users, and what that could mean for growth in the US.

4. Features improving – Instagram Stories, improved messaging, bookmarking, live video, comment filters and other updated features may have contributed to either attracting new users or reengaging older users who may have gone to other platforms,

5. Expiring content, Retaining Users – a fundamental part of Stories is the content expires in 24 hours which may have caused increased engagement.

Clearly, according to the SunTrust analyst, Instagram’s growth is accelerating, driven by an accelerated roll out of feature additions to the platform.

Canaccord Genuity (CG) analyst Michael Graham restated FB (1) stock at buy, stating that ‘core Facebook plus Instagram should carry fundamentals through 2017‘, sharing Hull’s bullish outlook on Instagram. The CG analyst further added that ad load concerns will be compensated for by ‘pricing and  Instagram‘, brushing away the bearish argument of ad loads hitting a peak on the platform.

Can Instagram deliver on these rising expectations? Is it the next major growth driver of the Facebook growth story?

Instagram Revenue Potential

Wall Street estimates for Instagram’s revenue contribution range from $1.8B to $3.2B. While SunTrust’s Rodney Hull expects Instagram to contribute $1.8B to Facebook’s top line this year, Eric Sheridan from UBS sees Instagram generating $2.27B revenue in 2016. Credit Suisse analyst Stephen Ju leads the pack of Instagram bulls, modeling $3.2B revenue for the photo sharing app in 2016.

Working off a 600M userbase, Instagram’s ARPU (Average revenue per user) should range from $3 to $5.33 in 2016. In comparison, Facebook’s core platform generated ARPU of $14.41 (2) over the last 4 quarters. Can Instagram follow the lead? If user growth and advertiser growth on the platform are anything to go by, Instagram will certainly see its ARPU grow further. The platform has seen its advertiser base grow to 500K in just over a year (Instagram rolled out its advertising platform in September 2015) and has more than doubled from the February number of 200K users. Certainly, Instagram growth will accelerate as a function of two tailwinds: a growing user base and growing ARPU.

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