Facebook FB's growth plans for its Instagram subsidiary should not be overlooked. The company has a range of opportunities to improve the monetization of its increasingly popular photo and video sharing app.
Alongside this, the company’s products such as Portal and Watch could help to offset the growing uncertainty that surrounds the popularity of the its flagship Facebook app. Changes made to the social media platform could also lead to higher quality time spent on it by users.
Although the stock has underperformed the S&P 500 in the last year, rising by 2% versus 17% for the index, it appears to have recovery potential.
Instagram growth
Facebook-owned Instagram continues to increase in importance to the company. It reached 1 billion monthly active users in June, which compares to Facebook’s 2.2 billion. The rate of growth in Instagram users is showing little sign of slowing. It increased from 800 million monthly active users in September 2017 to 1 billion monthly active users by June 2018.
New features within Instagram have the potential to not only increase user engagement, but to also monetize the platform. For example, the company plans to roll out its shopping in Stories feature to 46 countries across the world. This has the potential to reach 400 million active daily users within Instagram Stories, while over 90 million users tap on shopping tags within Instagram posts per month.
Instagram is also including a shopping section within its Explore tab. It is set to roll out across the world in the near term, with over 200 million users visiting the Explore tab per day. With the company’s Stories section allowing ads to fit neatly alongside content, it could prove to be a sustainable growth area for Facebook in the long run.
Product potential
Facebook’s video chatting service, Portal, is due to launch imminently. It is rumored to be releasing a smaller version which retails at $300, as well as a larger model that retails at $400. Both devices are expected to integrate Amazon AMZN's Alexa virtual assistant, as well as music streaming services that may include Amazon’s Music Unlimited or longstanding partner Spotify SPOT. The device uses facial recognition to identify users within view of the wide-angle camera lens, and could help to increase its exposure to the increasingly lucrative hardware marketplace.
The company’s Watch video-on-demand service is expected to be available globally following successful performance in the U.S. A range of interactive features have helped Watch to become increasingly popular in a segment that has historically been dominated by YouTube. Total time spent watching videos on the platform has increased 14x since the start of 2018.
The company has decided to expand its ad break availability to creators in a wider range of countries. It is also lowering the requirements for creators to enable ad breaks within their content. This should attract a larger number of creators to the platform as the opportunities for monetization have increased. The end result could be increased ad inventory for Facebook.
Potential risks
User engagement has become an increasing problem for the company in recent months. Time spent on Facebook has fallen by 7% year-on-year, while only 15% of teenagers view the social media platform as their most popular option. This figure is considerably lower than the 68% that was reported in 2012, and is well behind market-leader Snapchat SNAP. It is now the most popular social media option, with 41% of teenagers viewing it as their main site within the segment. With over 25% of Facebook’s U.S. users having deleted its app in the last year, its user base seems to be relatively dissatisfied.
Declining user engagement, though, has been partly caused by changes made to the company’s news feed. It has sought to reduce a focus on "fake news" and on viral videos, with the impact being a 5% reduction in time spent on the platform. The result of the changes is expected to be higher quality time spent by users on Facebook, which may mean the overall impact on profitability is negligible.
The popularity of Instagram, meanwhile, remains high. It is now more popular than Facebook among teenagers, with 22% choosing it as their favorite social media platform. While some uncertainty may be ahead for Instagram following news of the departure of its founders, its popularity and monetization opportunities are growing. Its international growth potential is also high, with it being under-monetized in emerging markets in particular when compared to the Facebook app.
Outlook
The company’s strategy has the potential to deliver a turnaround after a year of underperforming the S&P 500. Instagram’s monetization potential is increasing, with the photo and video sharing app continuing to grow in popularity. Changes being made to the app could lead to growing revenue without hurting the consumer experience.
Facebook’s products also have the power to offset its declining popularity among users. Refinements made to the app could lead to an increasingly focused product that provides superior monetization opportunities. Over a long-term time period the stock could offer investment potential.
