Snap's Unproven Monetization Potential Doesn't Deserve To Trade At A Premium To Facebook

Gene Munster, one of the Street's most respected analysts, left his position to co-found a venture capital firm called Loup Capital.

In an open letter to Snap Inc SNAP's management team ahead of its initial public offering, Munster implored the company to manage expectations, set an achievable goal or even offer investors conservative guidance figures that can be beaten.

Speaking as a guest on "Bloomberg Daybreak: Americas," Munster suggested that Snap didn't take his advice. Specifically, Snap guided its 2017 revenue to more than double from current levels to around $1 billion. The problem is investors are now forecasting that number to come in closer to $1.1 billion, which is an even harder metric to live up to.

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Munster continued that Snap's path toward $1.1 billion in revenue lies with its average revenue per growth. Currently, each member contributes around $2.50 in revenue which is well below Facebook Inc FB's level of around $22. So, if Snap just "inches higher" in its ARPU, it can hit $1.1 billion revenue this year — but it won't be easy.

Munster Would Have Rated Snap Neutral

Munster further stated that if he were still an equity analyst and covering Snap he would slap the company with a Neutral rating. However, he would lean more toward the cautious side especially ahead of the "lock-up" period, which as history has shown, is not a good event for hot IPO stocks.

Also, as he previously noted, expectations for Snap's 2017 performance has already moved above management's comfort level, which sets up a "roller-coaster for shares" — so there is no urgency to rush out and buy the stock today.

Beyond one year, Munster's opinion of the stock changes as the company will be uniquely positioned to be a big winner in the tech space because of its focus on the camera and the augmented reality features.

"The camera is the future of communication," Munster concluded. "We have gone away from texts and now we are moving to photos and videos."

Bottom line, Munster would have rated the stock with a Neutral rating with a cautious outlook in the near term but with a positive longer-term bias.

Image Credit: By Maurizio Pesce from Milan, Italia (Snapchat) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons