Facebook Inc (FB): Yes, Instagram Has Massive Potential!

One of the most under-appreciated assets of Facebook Inc (NASDAQ:FB) is clearly its photo-sharing app, Instagram. The market has not been giving Facebook any credit for owning one of the most valuable properties in the social media space. Instagram has seen explosive growth in its user base from April 2012, when Facebook Inc (NASDAQ:FB) acquired it for $1 billion. The increasingly popular Instagram now has more than 130 million users, and is expected to start monetizing this installed user base with ads on photos and videos.

Facebook Inc (NASDAQ:FB)

Immense growth potential

Facebook’s CEO made a fantastic acquisition right before its IPO in the form of Instagram. At the time of purchase, Instagram had roughly 27 million users, and fast forward to June 2013, Instagram now has more than 130 million users. Instagram has not only aided in delivering a better user experience on mobile, but also ramped up user engagement on mobile.

Instagram’s user community is very vibrant and robust. The user engagement on Instagram has reached staggering levels. Its rapidly growing user-base now gives out more than 1 billion likes each day on the platform. And the users are diving in and using various photographic filters to make pictures look good, the end result is that – more than 16 billion photos have been uploaded on Instagram.

With the rapid shift from desktop computers to mobile, the number of potential Instagram users can easily multiply from current levels in a couple of years as more and more mobile devices are activated across the globe.

Video sharing and monetization potential

Facebook Inc (NASDAQ:FB) recently introduced the ability for users to share videos on Instagram. The videos would be only 16 seconds long and seems like an improvement on Twitter’s Vine service, which allows users to share videos for only 6 seconds. However, the recently launched Vine already has more than 13 million users, which goes to show that members are interested to take bit-sized videos on social media settings with their mobile devices.

Instagram’s video sharing system provides more filters and editing options which make it more valuable relative to Vine. And most importantly, this is a good stepping stone for Facebook to get into the video space. As video ads are increasingly becoming more valuable, this is a great strategic move on Facebook Inc (NASDAQ:FB)’s part. The 16 sec long videos might be a great way for Facebook to start monetizing video ads. Already Facebook is one of the most important video sharing platforms in the world. According to comScore, Facebook is the 2nd most widely viewed video viewing platform in the U.S. with more than 60 million users, and is second to only Google Inc (NASDAQ:GOOG)’s YouTube in May-2013.

While Facebook Inc (NASDAQ:FB) doesn’t monetize this huge audience of video users, it is widely expected that Facebook will start monetizing video advertisements on Newsfeed. The large number of marketers on Facebook is expected to jump in with video ads on the social platform. And video ads can also be rolled out on Instagram’s new launched service down the road.

Increased competition

As user eyeballs are increasingly shifting towards online video and mobile, so are the advertisers. Google Inc (NASDAQ:GOOG)’s YouTube platform has more than 1 billion visitors, and it is a very valuable property for placing online video advertisements. And Facebook Inc (NASDAQ:FB)’s potential entry into the segment with Instagram’s video and Newsfeed video ramps up the competition. Other major players in online video advertising includes Yahoo! Inc. (NASDAQ:YHOO) and Hulu. Various Yahoo properties had more than 43.6 million visitors in the U.S. in the month of May, according to comScore.

Yahoo! Inc. (NASDAQ:YHOO) has recently ramped up its social presence with the acquisition of Tumblr for $1.1 billion. The rapidly growing Tumblr has more than 300 million unique visitors, who have already shared more than 50 billion blog posts. And the acquisition of Tumblr will enable Yahoo to add traffic to its media network and video network.

As a result, Yahoo! Inc. (NASDAQ:YHOO) will be stepping up its monetization plans for online video ads to keep up with Google Inc (NASDAQ:GOOG)’s dominance. And with Facebook and Instagram’s increased inclination towards video will lead to heightened competition for not only user engagement but also for online video advertising dollars.

Instagram is very valuable

At the time of Facebook Inc (NASDAQ:FB)’s acquisition, Instagram was a pre-revenue company with approximately 27 million users, and growing at a rapid pace. And Mark Zuckerberg paid out $1 billion to buy Instagram. In other words, Facebook paid out roughly $37 per user to buyout a competing social media company. Utilizing that math for Instagram’s 130 million users, the photo-sharing app can be valued at a whopping $4.8 billion.

And Instagram hasn’t started generating revenue by itself, but has likely contributed heavily to stimulate the user experience on mobile for Facebook. In Q1 2013, Facebook Inc (NASDAQ:FB) grew its top line revenues by 38%, and its mobile monetization hit a run rate of $1.5 billion. And once Facebook starts monetizing Instagram with display ads and video ads, the company’s growth rate should see a solid reacceleration from current levels as Instagram is a very formidable player on mobile.

Advertisers are diving in

Advertisers of all sizes love Facebook Inc (NASDAQ:FB), as it provides the ability to advertise on a social context while allowing the usage of user data. Such highly targeted advertising has enabled Facebook to have more than 1 million active advertisers on its platform and growing rapidly. As Facebook’s sales and advertising personnel already have strong relationships with these big advertisers as well as small businesses, the salesforce can easily cross-sell Instagram ads in the future. Clearly, both Facebook Inc (NASDAQ:FB) and Instagram have very lucrative positions in the long run.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG).

The article Facebook: Instagram Has Massive Potential! originally appeared on Fool.com.

Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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