Instagram Is Set to Make a Killing in Advertising in 2017

Facebook (NASDAQ: FB) doesn't disclose how much revenue Instagram generates, but if the numbers it does provide are any indication, it's a lot. Most recently, the company announced it surpassed 1 million active advertisers. That's up from 500,000 just six months ago and 200,000 around this time last year.

Instagram's rapid advertiser growth is accompanied by an acceleration in its user growth. The company added 100 million new users in six months to reach 600 million by the end of 2016.Of those users, 400 million log in daily.

While Instagram doesn't have as many users as its parent company had when it reached 1 million active advertisers, expectations aren't nearly as high as the ad revenue Facebook produced that year ($7 billion). But if Instagram even comes close to that number, it would produce a huge impact on its parent company's top line.

Image source: Instagram.

A pipeline of advertisers headed straight to Instagram

One reason for Instagram's rapid adoption among advertisers is the pipeline of 4 million active advertisers on Facebook. Aa Facebook faces ad load saturation on its main app, marketers have more reasons to experiment with Instagram advertising. Facebook can provide the same targeting capabilities on Instagram as it does on its flagship platform, but there's more available inventory on Instagram.

Image source: Instagram.

That's not to say Instagram hasn't done a good job on its own. It says it has 8 million businesses with profiles -- the equivalent of Pages on Facebook. For comparison, Twitter (NYSE: TWTR) said it had identified 9 million active businesses on its social network around this time last year.

But where Instagram has already converted 1 million of them into advertisers, Twitter only had 130,000 active advertisers as of the end of 2015. It hasn't provided an update since.

Instagram's outperformance can be (at least partially) attributed to the pipeline of advertisers coming from Facebook. With over 4 million businesses actively advertising on Facebook and over 60 million Pages, there are still plenty more advertisers for Instagram to court.

How important is Instagram's growth to Facebook?

As mentioned, Facebook is facing ad load saturation on its flagship platform. There's no more room for it to squeeze in ads without negatively impacting user engagement.

As such, Instagram will be a major revenue growth driver going forward. Analyst estimates for Instagram's revenue in 2017 average nearly $4 billion. Credit Suisse is on the high end, with an estimate of $6.4 billion. With the rapid growth in users and advertisers and the strong adoption of new features like Stories, Instagram may outperform the consensus estimates.

Overall, analysts expect Facebook to generate about $37.9 billion in total revenue, up from $27.6 billion in 2016. Instagram alone could easily account for around 20% of Facebook's total revenue growth based on estimates of $1.8 billion in revenue last year.

If Instagram keeps growing at the pace it's been (500,000 advertisers and 100 million new users every six months) it could contribute much more to Facebook's growth. While it won't completely offset the impact of Facebook's ad load saturation problem, the company should experience another year of very strong revenue growth thanks to its photo-sharing app. In the meantime, it can work on monetizing its messaging apps to keep the revenue growth engine churning for years to come.

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