April 12, 2018 / 8:04 PM / in 6 months

Breakingviews - Instagram might want to unfriend Facebook

NEW YORK (Reuters Breakingviews) - Instagram could do worse than unfriend Facebook. The photo-sharing site may be worth more than 80 times what the social network founded by Mark Zuckerberg paid six years ago. Now, though, the data leaks engulfing its corporate parent risk becoming a liability. Separating Instagram off – even if Facebook were to remain its biggest shareholder – might be a wise pre-emptive move.

Silhouettes of mobile users are seen next to a screen projection of Instagram logo in this picture illustration taken March 28, 2018. REUTERS/Dado Ruvic/Illustration

Facebook snapped up Instagram for $1 billion on April 9, 2012. The visual app was growing fast and attracting new users, but the price tag still looked like an example of inflated Silicon Valley valuations. Instagram had been valued at around $20 million the year before Zuckerberg knocked on the door of founders Kevin Systrom and Mike Krieger.

The acquisition turned out to be a savvy one. And to Zuckerberg’s credit, he allowed Instagram to flourish, retain its brand and remain effectively separate as far as users are concerned. Facebook doesn’t break out Instagram’s financial performance, but it is undoubtedly contributing a sizable chunk to Facebook’s top line. Analysts at Wells Fargo reckon that Instagram made nearly $4.5 billion in advertising revenue last year, representing more than 10 percent of Facebook’s haul.

One way to figure Instagram’s worth is to compare it to Snap, the $18 billion parent of the disappearing-messaging app that fancies itself a camera company. Investors value Snap’s equity, after deducting its net cash balance, at 10 times sales for the next 12 months, according to Thomson Reuters data. Revenue is expected to increase 60 percent to $1.3 billion.

Instagram’s 500 million daily active users vastly outnumber Snap’s 187 million, and its revenue is expected to grow at a faster pace. Instagram has 1.8 percent of the global digital ad market, eMarketer reckons. If it can add another 1 percentage point, revenue would hit $8 billion in 2018. Pop that on Snap’s multiple and Instagram has an enterprise value of $80 billion, almost one-fifth of Facebook’s total.

More than half of Americans don’t realize that Facebook owns Instagram, according to a survey conducted by internet privacy company DuckDuckGo. But increasing public scrutiny of Facebook by lawmakers, and distrust over the way it handles user data, could blemish Instagram’s own fortunes. Facebook might be better off setting it free before that happens.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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