The absurdity of a $35 billion valuation on a company division that is barely producing revenue is comical, but that is the valuation assigned to Instagram by a Citigroup analyst. The market and especially investors in Facebook (NASDAQ:FB) that bought the social picture sharing service for $1 billion were initially excited about that news. Clearly, Facebook got a great deal at the $1 billion valuation, but investors need to wise up to the proclaimed valuation.
The valuation of Instagram is curious, considering the constant comparison to the size of Twitter (NYSE:TWTR). Twitter is now worth only $24 billion, with monetization of the social site years ahead of Instagram. One has to wonder if Twitter isn't at play with the Instagram valuation projection and a service trapped inside a company worth roughly $227 billion.
User Bases Don't Compare
All the rage the last couple of weeks was the fact that Instagram MAUs (monthly average users) passed the 300 million milestone and the suggestion that the social site is now larger than Twitter. Investors should be cautioned that the Twitter comparison is from levels of several months back, and all users aren't equal. In reality, the logged-in user bases are similar, but Instagram is clearly on a faster growth plane.
Instagram grew 50% in the last nine months since releasing that it had reached 200 million MAUs. On the other hand, Twitter only grew MAUs by 23% YoY, to reach 284 million at the end of September. The user bases will be virtually equal at the end of the year, but Instagram is clearly on a higher trajectory.
The real issue is the value of each user and the logged-out experience. My previous article highlighted the massive logged-out users that consume the real-time news on Twitter. One also needs to realize that the user bases will never compare with Twitter, which tends to skew to a higher-value audience and data assets due to the "breaking news" nature of the contributions on that site.
According to Citigroup, the $35 billion valuation for Instagram is conservative, based on the expectation that the existing user base and engagement levels have a monetization potential of more than $2 billion. The monetization estimate jumps to $2.7 billion for 2015. The valuation is an incredible 13x the estimated monetization level.
Remember that Instagram is only now starting to monetize user traffic, so the actual revenue is only a small fraction of that level.
Twitter is already in the middle of its monetization growth plan, with revenue surging beyond $1 billion this year and heading toward $2.3 billion in 2015. The social media service recently outlined how it reaches $10 billion in annual revenue that includes increasing the ad load rate to 5% from 1%, doubling MAUs to 560 million, and monetizing the logged-out users at a $1.3 billion annual rate.
It is clear that if Instagram is truly worth $35 billion, then Twitter is the stock to own. Even at a valuation of $35 billion, Instagram has limited impact on the now giant $227 billion valuation of Facebook. In fact, a doubling of the Instagram value to $70 billion only increases the Facebook value around 15%. Not to mention, it isn't even clear how much the market values Instagram in that picture.
Twitter remains the stock to own if one believes in those valuation levels for this sector. Even at the relatively disadvantaged multiple of 10x 2015 sales, the stock is expensive for most market sectors. Compared to the multiples placed on Facebook as a whole and Instagram in general, it is an extreme bargain. Investors should use the recent tax-loss selling to load up on Twitter.
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