Instagram's Time Has Come

NEW YORK ( TheStreet) -- Many believe Facebook's ( FB) purchase of Instagram last year is starting to look a lot better, not only from a strategic standpoint but for revenue potential as well. Now, all the company needs to do is show it to the market.

Thursday's announcement to bring video to Instagram will eventually allow the company to showcase video ads on the social network to its 130 million monthly active users. Instagram has lost a little luster to Twitter's Vine, which allows users to take 6-second video clips and share them.

Instagram's service, available immediately on both Apple's ( AAPL) iOS and Google's ( GOOG) Android, is a little different. The videos are 15 seconds, and allow users to put a personal touch on them, with 13 new filters designed specifically for video, something advertisers and users will love, eventually.

Topeka Capital Markets analyst Victor Anthony is especially positive on the announcement, noting that the 15-second length has some meaning behind it. "The 15-second time limit coincides with what we have heard is the exact length of time for Facebook's planned launch of auto-play video ads, leading us to conclude that video ads on Instagram are on the come," Anthony wrote in a note. "Video ads on both Facebook and Instagram position Facebook, as a whole, to capture a meaningful slice of traditional media ad budgets." Anthony rates Facebook shares "buy" with a $40 price target.

Sterne Agee analyst Arvind Bhatia agreed with Anthony, but noted it will take time for this to play out. "Over time, we see video ads on Instagram as well within Facebook's News Feed," Bhatia wrote in a note. "Online video advertising is a rapidly growing but fragmented market and we believe these 15-second videos could prove quite effective/lucrative."

The market didn't react well to the announcement Thursday, sending Facebook shares lower following Instagram CEO Kevin Systrom demoing the product. Investors want to see something from Facebook, as well as Instagram, that shows an immediate return on investment. Products such as Graph Search and Video on Instagram are likely to be beneficial further down the line, but Facebook needs to demonstrate the potential sooner rather than later, otherwise the stock will continue to act poorly.

Shares of Facebook have underperformed the S&P 500 by 22% year to date.

FB Chart FB data by YCharts

UBS analyst Eric Sheridan took advantage of the recent weakness in shares to upgrade Facebook to "buy," raising his price target to $30 on the new monetization efforts Facebook has announced that Wall Street seems to be missing.

Video ads are going to be a big part of Facebook's future, as it strengthens itself as a mobile company, and Instagram's recent announcement may be a big part of that in the near future. "Based on our checks, Facebook plans to begin selling Newsfeed video ads in 2H 2013," Sheridan wrote in the note. "Our estimates assume that Facebook will be able to monetize daily video ad slots in the seven figure range. Our checks also indicate that FB will also begin serving ads on Instagram (no advertising to date) during 2H 2013."

Shareholders want to see a return on their $730 million investment when Facebook bought Instagram last year (the initial purchase price was $1 billion, but later fell as a large part of the deal was in Facebook shares), and they are getting antsy with Facebook's longer-term view. The fact that Instagram has over 100 million users and incredible engagement (Systrom noted the service is seeing over 1 billion likes per day), only demonstrates the potential for the service, and Facebook as well.

Instagram has gotten to the point where it's more than a niche product, and is a burgeoning, rapidly expanding platform. The recent introduction of Photos of You, which allows users to add other people and tag items in your pictures is a start to building revenue on the platform. Video on Instagram is the second, major step.

Instagram's time to start generating revenue has come. Only then, will the market appreciate product announcements. Otherwise, it's just more of the same, and that's not something shareholders will "like."

-- Written by Chris Ciaccia in New York

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