Aegis Initiates Coverage On SNAP, Sees Facebook Competition As Biggest Worry

Victor Anthony of Aegis Capital started coverage of Snap Inc SNAP with a price target of $22, and said the competition from Facebook Inc FB could hurt the company’s prospects.

Snap, the parent company of Snapchat is planning to debut on the New York Stock Exchange on March 2, allows its users to use short-lived images and videos to communicate visually. Daily Active Users have grown to over 158 million, with the 18 and 24 age group representing majority of its user base. Over 2.5 billion Snaps are created every day.

That said, Anthony’s prime concern is competition with Facebook as core Facebook, Instagram, Messenger and WhatsApp have launched similar product features as Snap.

“This is a major terminal value risk and one we monitor closely as it could lead to Snap's core demo moving to Facebook's apps,” Anthony wrote in a note.

Related Link: Why Snap Will Be The Most Controversial Internet IPO This Year

Further, Snap faces the same issues as Twitter Inc TWTR — slow user growth in some regions. The analyst pointed out Snap’s lack of an ecosystem as well as a lack of a clear path towards profitability.

On the advertising front, Anthony noted that Snap’s ad targeting capabilities are inferior to Facebook’s and Google's, and marketers cite analytics as a weakness relative to Facebook.

“[A] large percentage of advertisers view Snap as experimental spend – similar to Twitter at the time of its IPO,” Anthony continued.

That said, Anthony’s checks found that marketers are enthusiastic about the prospects of creating ads to get in front of Snap's coveted demographic base. As such, he sees Snap as a sustained ad share gainer over the next two years.

“That alone should be enough to lead to upside to the offering price range this year while management works to solve most of the above issues,” Anthony added.

Anthony sees revenues of $4.5 billion and adj. EBITDA of $850 million in 2020, for margins of 19 percent.