Instagram Stories Already Generates 10% Of Facebook's Ad Revenue

Facebook (NASDAQ:FB) didn't take long after it launched Instagram Stories in 2016 before it started inserting advertisements into the app's new feature. Facebook saw strong enough engagement that it felt confident enough to do so. About three years later, Instagram Stories has over 500 million daily active users and accounts for 10% of ad spending on Facebook's platforms, according to research from Socialbakers released this week.

The social media marketing company found ad spend on Instagram Stories increased nearly 70% year over year in its latest quarterly report. Facebook's overall ad revenue growth came in at 28%.

There is no doubt Stories has been a key driver for Facebook's revenue growth over the last few quarters. Now, as a significant contributor to the tech company's total revenue, investors need to consider whether Instagram Stories ad spend will continue to grow at a pace well over twice as fast as the rest of Facebook.

What's behind the growth?

So far Instagram Stories' ad spend has been fueled by an increase in ad load. Facebook increased ads in Instagram Feed and Stories in the second half of last year, according to CFO Dave Wehner. When it comes to Instagram Feed, Wehner has made comments that the company's not comfortable increasing ad loads further. It's less clear whether there's room to increase ad impressions per minute of engagement on Stories.

Growing revenue through increasing ad loads is the lowest-hanging fruit for Facebook. That said, it needs to be careful with its ad load increases, as it must balance it with engagement. Too many ads will negatively impact engagement, which is another way -- a more sustainable way -- to grow ad impressions.

Facebook hasn't provided an update on Instagram Stories' daily active users since the start of the year when it said it had 500 million daily active users during its fourth-quarter earnings call. It's not clear whether Facebook has seen a slowdown in growth or it's consciously holding back that number from the public for another reason. But with less room to increase ad load, engagement growth will remain an important factor for Stories to keep growing.

All that said, Wehner believes Facebook still has a ways to go before it maxes out ads impressions from Stories. "The impression growth is really the story for Stories, and will remain the story, we think, for the near future. So that will not be a price-driven revenue growth story, but rather an impression growth revenue growth story," he said during the company's third-quarter earnings call.

Room to increase pricing

Facebook has followed this playbook before. With its Facebook News Feed product it eventually saturated the percentage of sponsored posts it could show without degrading the experience and losing engagement.

But even after saying it had no room to increase ad load in News Feed, it saw considerable revenue growth due to strong increases in average ad price. What's more, it continues to see increases in impressions as users continue to spend more time in News Feed.

That bodes well for the long-term growth of Stories. Management has been very clear about the pricing gap between Stories ads and Feed ads. With more ad impression growth coming from Stories than Feeds, average ad price has declined slightly in each of the last four quarters.

Ultimately, Facebook should be able to drive considerable revenue growth from increased average price for Stories ads when supply stops growing as quickly and demand continues to increase. So far, Facebook only has 3 million of its 7 million active advertisers spending any of their budgets on Stories ads.

It's worth pointing out that Facebook is still growing its ad revenue at a healthy pace outside of Stories ads. Non-Instagram-Stories ad revenue grew approximately 25% year over year in the third quarter, based on Socialbakers' data. That goes to show that even after picking the low-hanging fruit, Facebook is able to grow ad spend relatively well thanks to the increasing shift in ad budgets to digital advertising. Stories ads still have a lot of revenue growth left and they're already having a meaningful impact on Facebook's top-line results.

This article originally appeared in the Motley Fool.

Adam Levy owns shares of Facebook. The Motley Fool has a disclosure policy.