Twitter, Inc's Biggest Threat Isn't Facebook

If investors were to subscribe to some analysts' perceptions of Twitter , there's even more upside than the tweet-master has already enjoyed. With its stock price up over 30% year-to-date, Twitter shareholders have already enjoyed a stellar 2015, and we're not even three months into the New Year. What could possibly drive Twitter's stock price run-up given its anemic monthly average user (MAU) growth, and its 2-to-1 ratio of non-tweeters to active users?

Twitter pundits point to its recent deal with Google to make it more likely tweets will show up on the search king's results, implementing new user functionality, and strong year-over-year revenue growth as reasons for optimism. Perhaps, but even as Twitter continues to follow in the footsteps of Facebook in terms of unveiling new ad tools, implementing video spots, and increased mobile usage, it's taken yet another step backward thanks to one of the other fastest growing social networking sites around.

Twitter, meet InstagramSetting LinkedIn and its targeted, professional users aside, Twitter had long held the distinction of being the country's, and the world's, second-largest social media site. At last count, Twitter boasted 288 million MAUs, up an anemic 4 million users from the prior quarter. For many investors and analysts, Twitter's MAU troubles aren't a concern; the aforementioned user innovations are expected to help jump-start growth.

However, when Facebook-owned Instagram announced it had surpassed 300 million MAUs at the end of last year, much was made of it blowing by Twitter in terms of usage, and rightfully so. As Twitter inches up in popularity each quarter, Instagram went from 200 million MAUs to over 300 million in less than a year. And the news gets worse for Twitter fans.

Last year's staggering 60% jump in MAUs here in the States catapulted Instagram past Twitter in terms of U.S. MAUs: 64.2 million, compared to 48.4 million, respectively. And according to data from eMarketer, the gap between what is now the number two social media site in the U.S. (Instagram) and the new number three (Twitter) will continue to widen over the next several years.

By 2018, as per eMarketer's report, over a third of the U.S. will be active users of Instagram, while just 20.8% are expected to opt for Twitter. And there's a lot at stake for digital ad dollars in the U.S. As much as 30% of this year's projected $187 billion in advertising sales are expected to be of the digital ilk. Clearly, there's a lot of growth potential for those able to gain market share in the domestic digital ad space.

Challenges going forwardAs it stands, Twitter is only looking up at Facebook and Google in terms of battling for advertising spend. But when Facebook CEO Mark Zuckerberg and team are done with the testing and tweaking of spots on Instagram, Twitter will move even further down the U.S. digital advertising list of alternatives. Why? Instagram's stellar MAU growth is one reason, as well as its demographics.

It wasn't long ago folks were bemoaning Facebook's lack of teen MAU growth. That was misguided for several reasons, not the least of which is a lot of those "lost" teen MAUs were migrating to Facebook-owned Instagram, and marketers love their teens.

While the majority of Instagram users are expected to fall into the 25 to 34 year-old demographic going forward, by 2019 nearly 62% of U.S. kids aged 12 to 17 years old will be monthly users of the photo-sharing behemoth. Now, combine those attractive demographics with Facebook's unmatched data collection and utilization to target the right ad, to the right person, at the right time, and Instagram will immediately move near the top of the digital ad list of alternatives.

Twitter executives can pooh-pooh Instagram's impressive MAU growth as little more than smoke-and-mirrors -- as its co-founder Evan Williams did recently -- but it's becoming increasingly evident that, by comparison, Twitter's moving in the wrong direction. Proponents are quick to point out Twitter's growing revenues compared to Instagram's little to none, but that's going to change. Only Zuckerberg knows when, but the day Instagram becomes a viable digital advertising option for U.S. marketing departments, Twitter is going to feel the pain.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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