Why Instagram Has Proven to Be a Steal For Facebook

Facebook (FB) purchased Instagram for approximately $1 billion in cash and stock in 2012, but the value of the photo-centric social network may potentially be worth nearly forty times that.

Bank of America Merrill Lynch analyst Justin Post believes that Instagram could generate more revenue for Facebook, on top of more than $10 billion generated in 2014. "We see a $4 [billion]+ revenue opportunity and potential valuation range for Instagram at $30 [billion] - $37 [billion] based on user and potential revenue comparisons to TWTR and FB," Post wrote in the note.

Instagram has been growing like a weed since Facebook bought it nearly three years ago, as monthly active users have surpassed 300 million. Users are spending more time on the service, thanks to its layout. Instagram adds 70 million photos per day, with 2.5 billion daily "likes," and users spend more than 20 minutes a day on Instagram, demonstrating how important it is to both advertisers and Facebook.

According to data from eMarketer, Instagram is poised to grow from 64 million U.S. users in 2014 to 119 million by 2019, a fact not lost on Facebook, Post wrote. "On the last earnings call, Facebook indicated growth in Instagram’s usage is strong and growing rapidly..."

Unlike Facebook, Instagram is not blocked in China, so not only do advertisers now have access to China, but the key U.S. teen demographic that is so coveted.

Bank of America's Post believes that with these stats, along with engagement growing more than 100% year-over-year, Instagram could not only surpass 500 million users by next year, but may be able to drive $5 CPM (cost per thousand views) per display ad, a number which may trend higher, given the photo-centric nature of the social network.

Instagram has also been tweaking its video capabilities, having introduced the ability to add 15 second clips on endless loop. With video ads driving higher rates than traditional display ads, Post believes video CPMs could be worth between $8 and $10 per user in the U.S., and $4 to $5 globally, further boosting Instagram's advertising prowess.

Assuming Instagram is able to generate around $6.50 in annual revenue per user by 2020, the company could be generating an additional $3.25 billion in annual revenue for Facebook, up from essentially nothing today.

But that's not all -- Instagram may be able to go well beyond that. "Given the visual nature of the Instagram platform, and audience and usage comparisons to Facebook (Instagram has less) and Twitter (TWTR) (more), we think there would be lots of room to increase long-term monetization above the $6.50 we assume for 2020," Post wrote in the note.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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