Cowen Initiates Snap Inc. At Outperform

Shares of Snap Inc SNAP gained more than 3 percent Monday morning after Cowen's John Blackledge initiated coverage of the company with an Outperform rating and $26 price target.

User Base

According to Blackledge, Snap's daily active user (DAU) growth hasn't been all up and a source of concern, particularly in the third and fourth quarter of 2016. However, this prompted the company to release twice as many new products and services in 2016 than all of 2014 and 2015 combined. In addition, Snap's employee headcount ramp will further boost the speed and execution of new product roll-outs.

Meanwhile, Snap's user base is "highly engaged" and visit the app around 18 times per day on average and spend a total of 25 to 30 minutes a day on the app. Perhaps more important, users under the age of 25 spend over 30 minutes a day, which is a "huge draw" for advertisers and critical to the long-term success of the social media platform.

Snapchat Versus Instagram

Blackledge surveyed 2,500 consumers in the United States and 1,250 consumers in the U.K. to better understand their engagement with Snapchat's Stories feature versus the similar feature on Instagram.

In the United States, 68 percent of Snapchat users viewed other stories versus 55 percent for Instagram while 49 percent posted to their Snapchat Story versus just 14 percent for Instagram.

U.K. consumers showed a similar tendency as 67 percent of Snapchat users viewed other stories versus 53 percent for Instagram and 46 percent posted to their Snapchat Story versus just 13 percent for Instagram.

Monetization

Blackledge suggested that Snap's monetization of its social media platform is still in its early days. The analyst is estimating a global average revenue per user (per DAU) of $6 in 2017, which is up 2x year-over-year but is expected to surge to $27 by 2022, which represents a 35 percent compounded annual growth rate.

Snap has room to grow through:

1. Increasing ad spend from existing advertisers.
2. Adding new brands.
3. Ramping the Direct Response ad channel.
4. Potentially monetizing the long-tail.

The Bottom Line

Bottom line, Blackledge believes that Snap is a leading social and messaging service that could gain market share over the years as its share of the worldwide mobile ad market (excluding China) could rise from just 1 percent in 2017 to 5 percent by 2022.

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