Instagram's Advertiser Growth Might Be More Impressive Than Its User Growth

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Instagram announced it's surpassed 800 million monthly active users at an advertising event in New York on Monday. Of those users, 500 million log in every day. It took just five months for the Facebook (NASDAQ: FB) subsidiary to announce another 100 million monthly users, just a bit longer than its previous milestone announcement. (That said, it's close enough that investors shouldn't consider this a slowdown since Instagram doesn't provide regular updates or exact figures.)

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Instagram has also added 100 million daily users in just eight months. That compares to Snap's (NYSE: SNAP) Snapchat, which has just 173 million daily users total. Instagram's growth is likely coming at the cost of engagement and user growth for Snapchat. Instagram Stories -- a direct copy of one of Snapchat's main features -- has been a catalyst for Instagram, accelerating user growth and grabbing 250 million daily users on its own.

Equally impressive, if not more so, is the announcement that Instagram has attracted over 2 million active advertisers. That's up from 1 million six months ago. It's been just two years since it opened its advertising products to the public, making it easier for small businesses to buy ads through its API. That presents yet another hurdle for Snap, as it looks to get its own self-serve ad platform off the ground.

Instagram doesn't need 1 billion users to be an interesting business

Facebook CEO Mark Zuckerberg has said products don't really become interesting as a business until about 1 billion users. He may have just been buying time for Facebook's messaging products (which, by the way, surpassed 1 billion users a long time ago). Instagram has been an interesting business for several years now -- even when it "only" had a half-billion users.

The fact that Instagram uses the same "feed" mechanism as the Facebook app has allowed the company to quickly and effectively monetize the app. Ad-buying tools for Instagram are tied into the same ad buying tools for Facebook, which has over 5 million advertisers. Additionally, Instagram ads and Facebook ads are very similar stylistically, so bringing an Instagram advertiser on board is relatively easy for Facebook. Snap, by comparison, is working on building a customer base from scratch, and spending heavily to build it.

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Instagram's user growth has certainly helped it attract more advertisers to its platform. Digital advertisers love big audiences, and 500 million people logging into an app every day definitely qualifies as big. Combined with Facebook's targeting capabilities, advertising on Instagram is attractive to everyone from brand advertisers looking for big groups of young people, to niche direct response advertisers looking for a few thousand users interested in a certain topic.

Snap's ad-targeting capabilities are relatively lacking. And with significantly less user data and easily parsed interest signals (like hashtags), it will never catch up to Instagram's capabilities. That limits that attractiveness of Snapchat's ads to bigger advertisers. And considering both Instagram and Snapchat's self-serve ad platforms use auction-based pricing, more bidders on Instagram will likely translate into higher average ad prices. In fact, Snap said it saw its average ad price declined last quarter as it moved from fixed-rate pricing to the self-serve auction.

800 million users can generate a lot of revenue

Just about six years ago, Zuckerberg announced Facebook had reached 800 million monthly active users and 500 million daily users. That year, Facebook generated $3.7 billion.

But that was well before Facebook had 2 million active advertisers. (It didn't reach that milestone until 2015.)

It was also well before people were weird if they didn't own a smartphone. Both Facebook and Instagram benefit greatly from the prevalence of the mobile internet. Instagram says its average user under 25 spends 32 minutes per day in the app. Snapchat says its under-25 users now spend 40 minutes per day in the app on average.

The user growth, advertiser growth, and strong engagement should support a substantial business for Facebook. It should be able to produce more than the $3.7 billion Facebook made when it reached the same level of users back in 2011 as a stand-alone app. And that, already, is a significant portion of Facebook's total revenue. It also represents a whole lot of ad dollars not going to Snapchat.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.