FB Stock: The Most Overlooked Reason to Be Bullish on Facebook Inc.

FB StockEveryone knows that Facebook Inc (NASDAQ:FB) is growing at an impressive pace. But growth in its core business might have already been priced into FB stock. Going forward, should you still keep the social network giant on your watch list?

The answer is “yes” and here’s why…

The Next Growth Driver for FB Stock

I’m looking at Instagram, the photo-sharing app Facebook acquired back in 2012. To some people, Instagram is just a mobile app like many others. But to Facebook, Instagram could be the next major growth-driver.

Earlier this week, Instagram announced that the app now has more than 200,000 advertisers. This is particularly impressive because Instagram only introduced advertising last September. (Source: “200,000 Advertisers on Instagram,” Instagram blog, February 24, 2016.)

Having 200,000 advertisers is a major accomplishment. Moreover, it seems even more amazing if you compare the number with other social media platforms. For instance, Twitter Inc (NASDSAQ:TWTR) began selling advertisements more than five years ago and now has around 130,000 advertisers.

Part of Instagram’s success in attracting advertisers comes from its giant userbase. The app has more than 400 million monthly active users (MAUs). While the number doesn’t look like much compared to Facebook’s 1.59 billion MAUs, it’s 80 million more than what Twitter has. (Source: “Twitter Q4 and Fiscal Year 2015 Shareholder Letter,” Twitter Inc, February 10, 2016.)

And how much did Facebook pay for this popular photo-sharing app? A mere $1.0 billion. That’s a great deal considering Instagram’s user and advertiser numbers today, especially if you compare them to Twitter, which has a market cap of more than $12.0 billion.

Having users and advertisers is a great thing. But to really become a growth-driver for FB stock, Instagram needs to contribute to the company’s financials.

Facebook does not break out the financial details for Instagram. But according to a study by eMarketer, Instagram’s mobile ad revenue made up 3.7% of Facebook’s total ad revenue in 2015. That number is expected to grow to $2.81 billion in 2017, making up 10.6% of Facebook’s total ad revenue. This suggests that by 2017, Instagram could surpass both Google and Twitter in mobile display ad revenue in the U.S. (Source: “Instagram Mobile Ad Revenues to Reach $2.81 Billion Worldwide in 2017,” eMarketer, July 27, 2015.)

Note that ramping up advertising on Instagram is also in line with the trend of shifting to mobile. In recently years, more and more users are using social media apps from their mobile devices. In the most recent quarter, Facebook’s mobile MAUs increased 21% year-over-year to 1.44 billion, not far behind Facebook’s total MAUs of 1.59 billion. (Source: “Facebook Reports Fourth Quarter and Full Year 2015 Results,” Facebook Inc, January 27, 2016.)

The neat thing with Instagram is that the mobile app gives users a very immersive experience, which is great for native advertising. As Internet users become increasingly aware of ads, having an ad that looks just like other content and won’t be ignored is crucial. The visual nature of the Instagram app itself makes it an appealing place for advertisers.

In fact, ads on Instagram are already producing great results for advertisers. According to Instagram’s blog post, “60% of Instagrammers say they learn about products and services on Instagram and 75% say they take action after being inspired by an Instagram post—like visiting a website, searching, shopping or telling a friend.” (Source: “200,000 Advertisers on Instagram,” Instagram blog, February 24, 2016.)

The Bottom Line on FB Stock

And let’s not forget that Facebook’s current financials are already impressive. Despite its giant footprint in the social media business, the company is growing like a startup. In the fourth quarter of 2015, Facebook increased its total revenue by 52% year-over-year to $5.84 billion and boosted its earnings per share (EPS) by 46% to $0.79. Note that these numbers also beat the highest estimates from Wall Street.

FB stock surged after the earnings report, but has come back down since entering February. For those who want a piece of the action in the next boom of this social media behemoth, the dip might be a good time to consider taking a closer look.