Snap Inc (SNAP) Gains a Bull on Better Risk/Reward


Snap Inc (NYSE:SNAP) shares were rising roughly 7% yesterday and continue to rise 3% in pre-market trading today on back of the needle-moving news that employees suddenly have eligibility to sell shares for the first time since the company’s initial public offering.

It was an exciting Monday yesterday to be a Snap investor, and the parade is only getting started, as Cantor analyst Kip Paulson decides to throw his bullish hat into the ring. Risk/reward before the expiration of the biggest remaining lock-up period that ended yesterday looked far more on a limb, particularly following the 8.5% sharp dip the popular Snapchat app parent company took after delivering second-quarter earnings.

Pinpointing a major tilt toward reward in what used to be a delicate balance, the post lock-up environment for Snap has the analyst upgrading Snap from a Neutral to an Overweight rating with a $15 price target, which represents a 15% increase from where the stock is currently trading. (To watch Paulson’s track record, click here)

Paulson notes, “Bulk of the lock-up has now expired. Snap’s lock-up expiration began on 7/29 and consisted of 400M shares on that date, 782M shares on 8/14, and 20M shares on 8/29 (per S3). Thus, much of the negative impact should now be behind the company. Founders Spiegel and Murphy said they will not sell any shares this year (~190M shares).”

Overall, long-term looks far more positive for Snap from an average revenue per user _ARPU) standpoint that looks like it could head towards Facebook’s $7 per daily active user (DAU) per quarter stats. Lower pricing garners a rise in return-on-ad-spend, argues the analyst, who sees this as compelling enticement for a wave of advertisers to want to invest in the platform. While DAU deceleration lingers nipping at Snap’s heels and cutthroat rivalry remains steep, DAU growth seems attainable in a new light, and traffic data in July appears “healthy” thanks to robust userbase engagement.

“Although DAU trends were disappointing in Snap’s first two quarters and the transition toward self-serve ad sales is an NT headwind on ARPU growth, it’s important to note that engagement is growing, DAU estimates appear to be more achievable, and there could be significant upside to ARPU in 2018 and beyond. Valuation now looks attractive to us, with the triple-digit top-line grower trading at 14.2x EV/rev on 2017 ests (7.4x on 2018) vs. ~30x shortly after IPO,” Paulson contends.

TipRanks analytics indicate SNAP as a Hold. Out of 26 analysts polled by TipRanks in the last 3 months, 9 are bullish on Snap stock, 12 remain sidelined, and 5 are bearish on the stock. With a return potential of 25%, the stock’s consensus target price stands at $15.78.  

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