Facebook-owned (FB) picture and video sharing social network Instagram announced that it will begin displaying ad content. Although several brands are already active on the network, this will be the first time that companies will pay to reach Instagram's 150 million users.
Since Facebook paid $1 billion for the company back in April 2012, we think advertising was an inevitable development. Some users will be upset about Instagram introducing ads, but users also predicted the demise of Facebook and Twitter advertising.
Yet, the popularity of Facebook and Twitter has remained resilient. As long as Instagram delivers relevant content in reasonable amounts, we doubt there will be much long-term backlash against the brand. Even the "most private" social network, Snapchat, has started to prepare to deliver ads to users via video.
Given Facebook's relevant expertise as a mobile advertising giant itself, we suspect Instagram will follow a similar model, if not share some of Facebook's advertising clients. Facebook generally utilizes a "friend" who likes a certain brand to display a story in order to deliver ads that users might find useful. Instagram can easily do the same.
Given Instagram's huge active user base, we think advertising will present a significant opportunity for Facebook to grow its mobile advertising revenue. Importantly, it helps establish Facebook as the preeminent company in mobile advertising, eclipsing rival Google (GOOG) and the soon-to-be-public Twitter (TWTR).
Shares of Facebook are currently exhibiting fantastic pricing strength. We acknowledge that Facebook could eventually be worth substantially more than our fair value estimate, but the uncertainty in predicting its cash flows makes us demand a wide margin of safety before establishing a position. That said, we're watching the firm closely.