Ads on Instagram could net up to $800M in four years

Analyst bullish on Facebook ads and ups price target to $58 from $50

Facebook spent nearly a billion dollars buying up Instagram last year, and now it is finally putting its largest acquisition to work as a money maker.

And so now Instagram is officially ready to start showing ads, it was announced on Thursday. The ads, which will be both photos and videos, will appear in users feeds, and will be from brands that the user does not follow. 

The company is being cautious about this: it promised to start with a "small number" of ads. It also said that it will "go slow" and encouraged its users to give any feedback on any ads that don't "feel right." 

"As always, you own your own photos and videos. The introduction of advertising won’t change this," the company said.

Why is this so important? Because advertising is key to social media companies that want to become real moneymakers. That is especially true for Facebook, which makes the vast majority of its money from that sector.

In its latest quarterly earnings report, Facebook's advertising revenue was $1.60 billion, or 88% of total revenue. It increased 61% from the same quarter last year. Mobile accounted for 41% of that revenue.

And that number will no doubt go even higher by the end of this year. 

Facebook's ad revenue for 2013 is set to see its mobile ad revenue shoot up over 333%, from $470 million to 2.04 billion, according to a report from eMarketer released in June.

Want to be even more impressed by how well Facebook is going to do in 2013? In 2011, the company's mobile ad revenue was zero. The company went from making zero dollars to over $3 billion in two years.

So putting ads on Instagram, with its 150 million monthly users, is key to Facebook's growth. And it is already causing at least one analyst to raise his price targets for Facebook.

Sterne Agee Analyst Arvind Bhatia has raised his target price for Facebook from $50 to $58, according to a report by AllFacebook.

"Assuming a U.S. ARPU of $4 for Instagram over the next three years and average U.S. MAUs of 100 million by then would suggest revenue potential of $400 million in the U.S. in the next three years and much higher longer-term. Europe and the rest of the world could add another $400 million over the next three to four years," Bhatia wrote.

"Net, we estimate that Instagram could generate $800 million in revenue in the next three to four years. We note that Twitter, with roughly 50 million MAUs in the U.S., is on a run-rate to generate $350 million to $400 million in the U.S. this year."

These numbers are a step up from last year, when Bhatia predicted that it would makes between $500 and $700 million in the same amount of time. 

(Image source: https://www.welovedates.com)