Facebook: A Photogenic World

| About: Facebook (FB)
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Instagram hits 500m MAUs, 100x more than the users at the time of FB purchase.

Critical in driving overall FB ecosystem, but competition from Snapchat is evident in decelerating image count metric.

Remain bullish on LT outlook. Non-ad revenue could include e-commerce and payment.

We live in a photogenic world, and I think this is partially why photo-sharing services such as Instagram (NASDAQ:FB) has been so successful in driving engagement. Just today the company reported that it now has 500m MAUs, more than twice that of two years ago. Since September of last year, the platform added 100m users, faster than the previous 100m. Instagram's growth has been nothing but remarkable since FB's acquisition in 2012. I believe that it will be an important part of FB's story as it expands its ecosystem beyond social networking and advertising and cross-sell ad products. On the same token, Instagram's growth also highlights the power of FB's network effect in that the platform saw users grow by 100x in just four years since FB's acquisition. In short, the growth potential of FB and Instagram is endless, and I would remain a long-term holder of FB.

Instagram timeline:

  • October 2010: Launch on iPhone
  • December 2010: 1 million users
  • June 2011: 5 million users
  • September 2011: 10 million users
  • April 3rd, 2012: 30 million registered accounts on iPhone, launches on Android
  • April 4th, 2012: Instagram sees 1 million Android signups in the first 24 hours
  • April 9th, 2012: Instagram hits 5 million monthly Android users, is acquired by Facebook
  • April 30th, 2012: 50 million monthly users
  • February 2013: 100 million monthly users
  • September 2013: 150 million monthly users
  • December 2013: 75 million daily users
  • March 2014: 200 million monthly users
  • December 2014: 300 million monthly users
  • September 2015: 400 million monthly users
  • June 2016: 500 million monthly users, 300 million daily users

Instagram fills a special purpose in FB's ecosystem, given its specialization in photo-sharing and how it caters to a more photo-centric demographic. Additionally, the platform is global with 80% of users coming from the outside of the US, allowing cross-selling opportunities for FB in markets where FB's core app has yet to gain popularity. Daily active users of 300m suggests an engagement level of 60%, on par to that of FB's core platform and not dilutive to the quality of Facebook's ecosystem.

When compared against rivals, Instagram has easily surpassed that of Twitter (NYSE:TWTR), which once again underscores my bearish view on the social media platform that is suffering from both competitive and structural challenges in the world of mobile social network landscape.

Although hitting the 500m MAUs is a milestone, Instagram is not perfect with image count per day decelerating at each 100m MAU mark. For example, images per year per MAU was 85 when there were 300m MAUs, but this number has declined to 69 at the 500m MAU mark. Snapchat could be partially responsible for the deceleration but I question how sustainable Snapchat can be going forward as a standalone photo-sharing app, without the financial backing and cross-selling opportunity that FB can provide to Instagram. My view is that Instagram is superior to Snapchat and competing platforms such as Tumblr (YHOO) and the recent product changes (i.e. video ad extension, video carousel ads, dynamic retargeting) as well as customer traction (200k advertisers and counting) will gradually pay dividends in the coming years.

Long-term evolution for Instagram could be e-commerce where merchants post pictures on their homepage and users can purchase goods and services using Facebook Payment. This is a natural extension given the rising number of Instagram-based stores being opened on the platform. Where there is an e-commerce store, there has to be a payment service to close the ecosystem loop and this is where I believe FB could drive incremental non-ad revenue (see - Facebook: Building Up Its Payment Network).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.