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Wall Street wants to know if Instagram can make money

July 29, 2015, 11:07 PM UTC
Pictures appear on the smartphone photo
Pictures appear on the smartphone photo sharing application Instagram on April 10, 2012 in Paris, one day after Facebook announced a billion-dollar-deal to buy the startup behind Instagram. The free mini-program lets people give classic looks to square photos using "filters" and then share them at Twitter, Facebook or other social networks. AFP PHOTO THOMAS COEX (Photo credit should read THOMAS COEX/AFP/GettyImages)
Photograph by Thomas Coex — AFP/Getty Images

You know a company is doing just fine when the first analyst question in an earnings call amounts to, “Why aren’t you spending more money?” (Facebook CFO Dave Wehner kindly explained that he’s spending money as fast as he can thankyouverymuch, and will continue to do so through 2015, which is “an investment year” for the company.)

That matched the tone for Facebook’s second quarter, which was just fine — not blockbuster by Facebook standards, and not bad either. The company earned $4.2 billion in revenue last quarter, a 39% increase over the year prior. It turned a healthy profit of $719 million, or $0.25 per share. Even so, investors traded the stock down more than 3% in after hours trading.


Facebook (FB) has been popular with investors over the last two years, even as CEO Mark Zuckerberg does the sort of thing investors tend to hate: dropping mind-boggling sums of cash on virtual reality and messaging startups, and spending his time on the humanitarian-tinged project, Yet Facebook’s stock has been pretty much invincible, thanks to healthy profit margins and steady growth in users, engagement, and revenue.

Part of that is because investors’ biggest complaints about Facebook – that it was late to mobile and that it’s no longer cool with teenagers – now have simple answers. The company makes an astounding 76% of its revenue from mobile today, and Instagram, with 300 million users, is in no danger of losing its cool.

No, now analysts are now obsessed over whether Instagram can profit from that coolness. Facebook has been running ads on Instagram since last year, but has yet to deliver any figures such as how much ad revenue Instagram earns. Since Instagram was Facebook’s first big acquisition of a standalone product, it sets the tone for the way its subsequent deals for Oculus VR and WhatsApp might eventually monetize.

On the earnings call, analysts asked how broadly Instagram will open to advertisers and whether those ads target different consumers. They asked whether Instagram users are more willing or less willing than Facebook users to interact with ads. They asked whether Instagram can ever be a “realtime snapshot of the world.”

They didn’t get much of an answer. Instagram remains small relative to Facebook, Sandberg said. “It’s going to really take time to have significant impact on our growth,” she added.

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That hasn’t stopped others from speculating on Instagram’s revenue. Emarketer predicts Instagram will bring in $595 million in ad revenue this year, which is no drop in the bucket relative to Facebook’s $12.4 billion last year. A Wall Street analyst said in December that Instagram is worth $35 billion.

Facebook’s answer to analysts eager to see revenue from its big acquisitions has not changed from quarter to quarter. It is, essentially, look at how we monetized News Feed ten years ago. That’s what we’re doing here, too. In other words, don’t hold your breath.

For now, the best official word we’ll get from Zuckerberg is a sloppy wet kiss to Instagram co-founder Kevin Systrom. “Kevin and the team are doing amazing work,” he said. “The clarity of focus and clarity of the vision … has been exceptional.”