3 Reasons Meta's Threads Could Be an Even Bigger Value-Add Than Reels

Meta Platforms' (META -0.05%) latest copycat product, Threads, is off to an incredible start.

Meta launched Threads, a clone of Twitter, on Thursday, July 6. By the next morning, it had 30 million users, and it topped 100 million over that weekend. Meta is capitalizing on a disgruntled Twitter user base actively looking for alternatives and an easy signup process, by leveraging its existing Instagram users.

Despite the rapid rise of Threads, Meta doesn't have any immediate plans to monetize the 100 million-plus people scrolling through the new app. Still, Threads could be an even bigger source of revenue growth over the coming years than Reels, the company's TikTok clone built into the Instagram and Facebook apps. Here are three reasons investors should be even more excited about Threads.

1. Less cannibalization

As Reels increased in momentum, one of the biggest challenges for Meta was that it took time away from the Feed and Stories formats on Instagram and Facebook. Those are parts of the app that Meta monetizes at a very high rate.

In fact, despite increased monetization levels for time spent on Reels in recent quarters, it remains a drag on overall revenue. Management expects to get the impact of Reels to a neutral level by the end of the year when the increase in time spent will offset the lower monetization rate for Reels.

Threads won't be competing with the main Instagram and Facebook apps. For one, it's a separate app. Meta won't be funneling users toward Threads as much as it did for Reels.

Moreover, it's competing with a pre-existing platform that Meta doesn't own: Twitter. Threads is aiming to take time away from Twitter, not Instagram or Facebook. To that end, there's already evidence that Twitter is seeing a decline in traffic coinciding with the launch of Threads.

As long as the majority of time spent on Threads isn't coming from time spent on Facebook or Instagram, it can only add value to Meta's family of apps.

2. Meta will be able to grow threads quickly with AI

Meta has been rapidly improving its artificial intelligence (AI)-recommendation algorithm since the launch of Reels about three years ago. That algorithm can go a long way toward building engagement on Threads.

By taking the work it's already done with AI, Meta can spin the flywheel of growth even faster on Threads than it could on Reels. That means it can go from 100 million to 1 billion users even faster than previous products given just a small amount of initial engagement. And with 100 million users signed up within five days, I'd say it's already got that small amount of engagement it needs.

When users sign up for Threads, they can connect to their existing network on Instagram. What's more, the AI recommendation algorithm will surface content it thinks users are most likely to want to see. That means new users can come on board quickly and find interesting content on the brand new app.

3. Monetization will be fast

Meta isn't reinventing the wheel with Threads; it's copying an app that would be old enough to drive. Advertisers already understand how to make the most of the format. What's more, Meta also knows how to make the most of the format as it's not too dissimilar from Facebook's Feed product.

Investors should expect Meta to follow the same game plan it's followed for just about every other product rollout. CEO Mark Zuckerberg described the strategy recently. "In the beginning, [we were] just saying, OK, just let's make something that works for people," he explained on Meta's fourth-quarter earnings call. "Once we get to many hundreds of millions of people or billions of people using it, then we'll focus on ramping up the monetization."

Meta won't face any of the challenges it experienced with Reels. Reels is a newer format, and advertisers haven't quite figured out the best way to advertise with it. Reels also has fewer advertising opportunities per minute spent on the platform.

A big opportunity

Meta has taken advantage of a significant opportunity in the market to finally strike a meaningful blow against Twitter. Elon Musk expects Twitter to generate $3 billion in revenue this year, which wouldn't have a huge impact on Meta's finances. For reference, Meta generated over $116 billion in revenue last year.

But building another platform with over 1 billion users has a lot of potential for billions in revenue, especially with Meta's existing base of advertisers and user data. Evercore ISI analyst Mark Mahaney said Threads could generate $8 billion in additional revenue for Meta by 2025 if it can sustain 200 million daily active users (DAUs).

That would be just $1 per quarter per DAU. I think the monetization potential is even higher. Facebook's average revenue per monthly active user (MAU) last quarter was $9.62. So Threads could quickly add billions of revenue to Meta's top line in just a few years, and a lot of that will flow to the bottom line. While it's still early days, the upside of Threads is another reason to buy shares of Meta.