Why Threads Is Great For Meta

Summary:

• Meta Platforms, Inc. launched a new app, Threads, earlier this week. The new text-based social media platform is currently viewed as a direct competitor to Twitter.
• The introduction of Threads underscores how the evolution of social preferences from text to images to now videos, as outlined by CEO Mark Zuckerberg, continues to be fundamentally grounded in text.
• While management has yet to reveal monetization plans for Threads, the new app is expected to drive significant synergies across the Meta family of apps.

Meta Platforms, Inc. (NASDAQ:META) has long been a successful challenger of rival social media offerings by creating and monetizing a dupe of its own, thanks to its still-expanding user base that continues to reinforce its dominance in the industry. After some success in ramping up engagement on Reels – the short-form video format that copies TikTok – Meta has moved onto its latest attempt in replicating Twitter, reverting to the legacy format of communications through text.

Meta launched Threads on Wednesday, July 5, and the new app’s integration with Instagram has already helped it take the social media world by storm, attracting “5 million users in first hours” of launch. Threads’ integration with Instagram has garnered more attention than Meta’s latest introduction of subscription and broadcast channel features within the picture-sharing app earlier this year, underscoring burgeoning interest in the Twitter copycat.

The social media giant has come a long way from signal loss headwinds that had previously overhauled its flagship targeted ads business, and continues to overcome competition and macroeconomic challenges through new and differentiated innovations. This includes progress in ramping up engagement and monetization of Reels, as well as the continued roll-out of AI-driven content recommendation system across its apps, AI-enabled ad creation solutions for advertisers, and other value-adding in-app features for users such as subscriptions and broadcast channels. The swift adoption of generative AI to bolster the effectiveness, performance, and economics of targeted ads delivery for advertisers, alongside meaningful cost efficiencies realized within internal operations, have also overshadowed market’s earlier abhorrence for its cash-burning metaverse ambitions.

The Meta stock’s rally this year has been relentless, approaching the $300 level last seen in early 2022. While the company has yet to announce plans to directly incorporate ads in Threads, nor has management provided a monetization roadmap for the new app. We expect the new platform to drive incremental engagement on Instagram and, inadvertently, Meta’s various advertising formats (e.g., Reels), reinforcing growth prospects for the family of apps segment.

You’re Probably on Threads

Meta Platforms launched Threads – the Twitter dupe – earlier this week, marketing the new offering that is linked to Instagram as a standalone app. Unlike Facebook or Instagram, Threads marks another text-based app like Messenger that requires an existing Instagram account, joining users’ follower and following bases between the two.

For those that use Twitter, Threads is an impressive replication of the short-form text-based platform. The newly introduced app does not only feature the like, comment and out-of-app share functions, but also the infamous Twitter “retweet” – or “repost,” as Threads calls it – button that allows users to share content that they resonate with within their accounts. Users on Threads can upload messages featuring up to 500 characters, almost double the 280-character limit on Twitter. Management also cites more “enhancements” are on the way, including “tagging, searching by hashtags, and a home feed for people [users] follow.” Threads is also currently not yet available in the EU due to regulatory hurdles.

And do not be alarmed if you are starting to see threads from handles you do not recognize – the new platform also recommends threads from outside of users’ following list. This is line with Meta’s focus on showing more of what they believe to be preferred content personalized based on user data in order to optimize engagement across its family of apps, which has so far been a controversial topic amongst both content creators and users.

Digging deeper into the infrastructure, Meta plans for Threads to become interoperable between other social media platforms across the “fediverse,” which refers to the “network of different servers operated by third parties that are connected and can communicate with each other.” Essentially, Threads content can be shared to platforms outside of Meta’s family of apps directly without the need for screenshots or copy-and-paste, and public profiles can be accessed and followed by “people using different servers on the fediverse.” But management has yet to provide a structural timeline on when such interoperable features will come online for Threads, with the app likely to stay within Instagram’s walled gardens within the foreseeable future.

A Salvation for Ads

Since Threads’ launch, the new app has garnered “more than 30 million users” – or about 10% of Twitter’s user base – as reported by Bloomberg News on the morning of July 7th. By the afternoon when I signed up, my Threads badge – which is represented by a number “indicating how early the Threads account was created” – was already in the 62 millionth range, underscoring accelerating interest, although there is still long ways to go before reaching Meta CEO Mark Zuckerberg’s aspirations to turn Threads into a “public conversations app with 1 billion-plus people on it.” It is also unclear how much of the figure represents new Instagram sign-ups looking to partake in the newest social media platform.

While management has not announced any plans on how Meta will be monetizing Threads yet, nor is there a timeline on when the new app will start showing ads, the latest development is likely to be complementary to the company’s broader efforts in shoring up demand for its core advertising business across the family of apps. At a time when media and markets are focused on how Meta’s launch of Threads comes at an opportune time when Twitter is ladened with changes that have been met with user pushback, we think the new offering unlocks greater value from leveraging interest amongst its expansive existing Instagram user base in the meantime instead.

By leveraging Instagram’s 2+ billion user base, filled with influential content creators and celebrities boasting deep ties with both brands and day-to-day visitors on the app, Threads is expected to further engagement and, inadvertently, ad dollars from the industry. At the sign-up page, Threads displays a clear prompt that Meta will be using users’ information on the new app to “personalize ads and other experiences” across Instagram as well.

While there is currently little information on the volume of average daily posts on Threads per day, taking Instagram’s statistics as proxy implies the new app has potential to generate as much as 3 million new conversations per day (2 billion users generate about 95 million photo/video posts per day, pro-rated for the estimated 62+ million users on Threads at the time of writing). And the volume of incremental content from Threads, which Meta can leverage to further effectiveness of its personalized advertising business across its family of apps, could potentially accelerate further, considering massive value from its content creator economy. Specifically, Meta management has expressed that Threads is born out of content creators’ long-time ask for an “alternative to what’s out there, [without having] to start over and build out a following from zero.” And by leveraging this content creator economy – which is keen on updating their different platforms (e.g., Instagram, TikTok, etc.) and sub-platforms (e.g., Instagram broadcast channels) at least once daily – Threads shows potential for benefiting from an incremental data advantage against similar rival platforms.

And Threads’ tight interlink with Instagram likely minimizes the costs of generating said incremental data, given its ability to leverage the picture-sharing app’s existing exposure and infrastructure. If you are active on Instagram (or even Twitter any other social media platform, really), your feed and stories have likely been filled with Threads screenshots and direct links to the newly created accounts of family, friends and content creators you follow over the last two days. And this is poised to generate an interest for existing Instagram users to click the link, download Threads, and partake in the new conversations that are going on in the text-based social media app, reinforcing engagement across Meta’s family of apps.

This is expected to complement the company’s ongoing efforts in restoring the effectiveness of its targeted advertising format after Apple (AAPL) severed its access to user data post-ATT – an endeavor that Meta has been making impressive progress on, especially with the recent implementation of generative AI capabilities to improve targeted ad delivery effectiveness and performance, while also improving advertisers’ cost efficiency by enhancing returns on ad spending (“ROAS”). While Meta has no immediate plans to offer direct ad placements on Threads, the incremental engagement and data generated at potentially low acquisition cost will complement traffic on Instagram and bolster core ad sales.

The introduction of Threads effectively bolsters Meta’s ability in overcoming the uncertain advertising industry spending environment this year, given inherent macroeconomic sensitivities in the business, alongside ongoing challenges in restoring advertisers’ confidence in social media advertising. Global digital advertising is expected to expand 8.5% y/y, as slight acceleration from the prior year but still slow-growing relative to 2021. Meanwhile, social media ad demand is expected to reaccelerate from about 5% y/y growth in 2022 to 9.4% y/y in the current year, bolstered by 8.6% y/y growth in short-form video ads which is beneficial to the continued ramp up of Reels monetization efforts. However, demand for social media advertising remains a far cry from historical levels, and is dwarfed by strength in search, e-commerce, and long-form video (i.e., AVOD) formats, as macroeconomic uncertainties have advertisers keen on spending limited budgets on platforms with proven engagement, effectiveness and performance metrics, alongside optimized ROAS.

Yet, Meta has been checking all the boxes with its introduction of post-ATT resolutions – spanning performance measurement APIs, Advantage+, and generative AI-based ad creation tools – consistently improving effectiveness, performance and ROAS for advertisers. The latest introduction of Threads is also expected to bolster engagement across family of apps, which will be critical to maintaining the appeal of Meta’s advertising formats to advertisers, especially at a time of cautious spending and increasing industry competition for a contracted pool of ad dollars amid persistent macroeconomic headwinds. Taken together, we expect Meta to be a core driver of social media ad demand growth this year, and remain a key beneficiary of re-acceleration, albeit slight, in the macro-sensitive industry.

The Bottom Line

While it is difficult to quantify the potential growth contribution stemming from Threads, as management prioritizes getting “as many people excited about the product as possible” over direct monetization of the platform, the latest launch is expected to drive incremental engagement across Meta’s family of apps and bolster its core ad sales, nonetheless. The introduction of Threads paints an additive picture to Meta’s impressive improvements made this year – across both the top- and bottom-line – which complements its “year of efficiency” mantra for 2023.

In addition to amplifying engagement across Meta’s family of apps, Threads is also expected to optimize the company’s ongoing growth investments by leveraging existing infrastructure, interest, and content creator economy in Instagram, lowering the acquisition cost of new users and incremental data critical to its core advertising business.

Albeit nothing disruptive, given its resemblance to Twitter, Threads is an exciting new development for Meta that will not only take engagement across its family of apps to new heights, but also drive incremental scale for the business by leveraging existing resources, improving both growth and profitability, and, inadvertently, its valuation prospects ahead.

---

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---

Thank you for reading my analysis. If you are interested in interacting with me directly in chat, more research content and tools designed for growth investing, and joining a community of like-minded investors, please take a moment to review my Marketplace service Livy Investment Research. Our service’s key offerings include:

• A subscription to our weekly tech and market news recap
• Full access to our portfolio of research coverage and complementary editing-enabled financial models
• A compilation of growth-focused industry primers and peer comps

Feel free to check it out risk-free through the two-week free trial. I hope to see you there!