Facebook's Shift To Stories Ads Is Moving Quickly

During Facebook's (NASDAQ:FB) third-quarter earnings call, Mark Zuckerberg warned analysts that it will take some time for ads in Stories to become a significant revenue growth driver for Facebook. He said ads in Feeds will continue to be the main revenue driver for the next couple years.

An early peek at how advertisers spent their Facebook ad budgets last quarter suggests the transition might move more quickly than that. Stories ad budgets increased 94% sequentially in the fourth quarter, according to Facebook marketing partner Nanigans.

That kind of growth ought to encourage investors that revenue acceleration is just around the corner.

All about return on investment

Advertisers only care about one thing: getting the best return on their ad spend. That can be difficult when transitioning to a new ad product because advertisers need to adjust to producing the right creatives and targeting the right audiences. That generally results in small experimental ad budgets and lower revenue per impression as marketers figure things out.

Both are quickly moving in the right direction for Facebook's Stories ads, and marketers are seeing improved returns as well. "Brands that follow the proper ad creative guidelines for Stories ads could see a 50%-70% increase in mobile app ROAS (return on ad spend)," Nanigans said. That's despite an increase in average cost per impression of 112% year over year for the format.

As marketers and Facebook continue to improve the performance of Stories ads, both numbers ought to continue climbing. At some point, return on ad spend will reach an equilibrium with other Facebook ad products, at which point ad prices will only be driven by improved returns (leaving return on investment stable). Until then, there's a lot of growth left for the company to unlock.

Controlling the supply side

Nanigans data shows a 124% year-over-year increase in Stories ad spending while cost per impression increased 112%. That suggests total impressions in Stories grew only modestly over the past year -- a little over 10%. That's despite rapid growth in Stories users, which reached 1 billion total users as of November.

Facebook has shown modest ad impression growth throughout 2018. Impressions increased 25% in the third quarter, showing some acceleration as a result of increased Stories ads, but the company has done a good job increasing the value of those ad impressions to keep its average ad price moving up.

To be sure, Stories ads are still priced below Feed ads. Controlling the supply and growing average ad prices is an encouraging sign that Stories ad prices will reach a comparable level to Feed ads.

Facebook saw a similar dynamic as mobile ads became its dominant source of revenue. It was able to increase ad prices quickly by continuously producing strong returns for advertisers. Then it opened up significantly more supply to match the strong growth in mobile engagement from its users.

The strategy has the benefit of maximizing engagement on a product like Stories, getting users invested in the format, and then maximizing its monetization by finding the ad load saturation point.

What investors can expect in 2019

As Facebook continues its transition to more Stories ads and possibly fewer Feed ads, investors will notice a few things in the company's usual reported metrics.

First and foremost, ad revenue growth will continue to slow before it starts accelerating. Feed ads are still the vast majority of ad spending on Facebook. Stories ad prices are climbing quickly, but the units are still a small part of the sales mix. But as Stories ad prices climb and marketers continue to increase their investments, that will start showing up in overall revenue growth. Investors should expect to see slower revenue growth through at least the first half of 2019.

Within that revenue growth, Facebook provides two key metrics to consider: growth in ad impressions and growth in price per ad impression. Ideally, investors want to see slow but steady growth in ad impressions and high growth in average ad prices. That's an indication that Facebook isn't increasing its ad load, and that it's relying solely on improved ad efficacy to increase ad prices and investment from marketers.

That said, Stories may lend themselves to higher ad loads than Feeds. Users might see more ads, but those ads might not be as effective for marketers, so the average price will be lower. Understanding that dynamic is key to understanding whether the shift to Stories ads continues to go well throughout 2019.

This article originally appeared in the Motley Fool.

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