Instagram Stories Will Be Key To Facebook's 2019

Privacy concerns and slower user growth have many marketers shifting digital ad budgets away from Facebook's (NASDAQ:FB) News Feed. Separate surveys from eMarketer and Cowen show Facebook's share of the digital advertising market falling over the next two years as competitors like Amazon (NASDAQ:AMZN) grow their share of the market.

Cowen's survey suggests Facebook could lose 3 percent of its U.S. market share over the next two years while Amazon doubles its share from 6 percent to 12 percent. But Instagram will grow its market share 2 percentage points in the same period, mitigating the losses at Facebook.

Specifically, Cowen sees Instagram's share of video ad spending doubling over the next two years, fueled by Stories. Facebook has Stories products in each of its four major apps: Facebook, Instagram, WhatsApp, and Messenger. As more people shift their sharing to Stories instead of public posts, Facebook is undergoing a transition in ad spending on its platform. Instagram Stories will play a critical part in that transition this year, and other Stories products could help it reaccelerate revenue in the future.

Better than TV ads

One of the most interesting findings from Cowen's survey is that 61 percent of marketers surveyed consider Instagram the best way to reach consumers aged 13 to 34. That includes traditional television advertising. (It's also worth noting Facebook's core platform remains the best way to reach consumers 35 and up outside of television.)

Indeed, young users are highly engaged on Instagram. In August 2017, the company said users under 25 spend an average of 32 minutes per day on the app. More recently, SimilarWeb estimated that Instagram users spend an average of 53 minutes per day on the app. Instagram and Stories have only gotten bigger since then, growing from 250 million daily active Stories users to 400 million in Facebook's last update in June 2018. There are now 1 billion total monthly users on the Instagram app.

Facebook has a lot of demand from advertisers and it has a ton of supply for Stories ads from its highly engaged user base. The challenge for Facebook is that Stories ads are a very different beast than ads in News Feed. It experienced similar challenges when it first introduced News Feed ads and when it transitioned to mobile. The only difference was Facebook was a much smaller portion of advertisers' budgets at those points in time.

Pricing for a Stories ad is still below pricing for a News Feed ad. That's because marketers and Facebook have perfected advertising in News Feed to maximize ROI. Stories still requires a lot of experimentation to figure out what works, and Facebook needs to work with marketers to develop new ad products to improve conversions in the new format.

Take a step back and look at the big picture

Investors might see Amazon as a major threat to Facebook, stealing market share in the digital advertising space from the social media company. Cowen's survey even suggests marketers' ad spending on Amazon is coming directly out of their Facebook ad budgets.

But it's important to take a step back and look at the market as a whole. The digital advertising space is one of the few areas of growth for ad spend. It's already the largest source of ad spending in the world, and the gap is only getting bigger. Digital ad spending is growing about 10% per year, while spending on most other media remains flat.

Facebook has dominated the market for years, and it makes sense that its share will shrink somewhat as the market continues to expand and new competitors pop up. Even so, the company is still expected to grow its revenue greater than 20 percent in each of the next two years.

Facebook has become a dominant force in Stories, which is proving to be the next big social sharing format. As Stories sharing surpasses sharing in feeds, it has the potential to become an even bigger advertising business than its predecessor.

That'll start with Instagram, since it's the most well-developed and has a concentrated demographic that's particularly valuable (i.e., young Americans). Facebook will eventually expand what it learns at Instagram to the rest of its Stories products. That will enable Facebook to reaccelerate revenue growth in the next decade.

This article originally appeared in the Motley Fool.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool has a disclosure policy.