Bank Of America Cites Ad Prospects, Content Growth In Snap Upgrade

Snap Inc SNAP has seen steady gains year to date. Its stock now rests up 138%, and one team of analysts is convinced the growth isn’t over.

The Rating

Bank of America analysts led by Justin Post upgraded Snap to a buy and maintained an $18 price target.

The Thesis

The stock has waned a bit since striking its all-time high in August. It’s now down 23% from its peak despite strong industry ad spending. This is one factor informing Bank of America’s upgrade.

“The Street appears to be concerned on high 3Q DAU [daily active user] growth expectations and 4Q DAU weakness given recent Ad Manager checks that suggest declines in Sept/Oct ad user reach,” the analysts wrote in a note. “We note that Ad Manager doesn’t track DAUs (which Snap reports) and we think strong ROW Android downloads, engagement with Discover content, and normal 4Q usage seasonality (as shown in 2016/17) will drive user growth in-line with our 4 million-plus 4Q quarter-over-quarter estimate.”

Their optimism is bolstered by continued content releases for Discover, which could drive expansion in average revenue per user.

“We think Discover content is a better format for Snap to monetize the high levels of engagement on Snap, while the launch of dynamic ads out of Beta will give Snap a new format to better compete for eCommerce spend in 2020,” they wrote.

By Bank of America’s estimates, accelerated user adoption of over-the-top services could drive ad spending in online video through 2021, which would further work in Snap’s favor.

The fourth-quarter is projected to be Snap's first term with positive earnings before interest, tax, depreciation and amortization.

Price Action

At time of publication, Snap shares were set to open up 3.3% at $14.26.

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