The Ratings Game: Snap can still ‘dream the dream’ as earnings show big Snapchat growth still possible


Snap Inc. showed continued revenue and user momentum in its latest earnings report, fueling optimism about the company’s longer-term opportunities and the “investability” of its stock.

Shares of Snap

gained 7.5% Friday after the social-media company topped expectations on revenue and user growth while also delivering a surprise breakeven performance on adjusted earnings.

“We have rarely — er, never — seen a company grow revenues +66% in a quarter and identify factors that suggest that the best is yet to come,” MoffettNathanson analyst Michael Nathanson wrote following the report.

It’s not particularly new to suggest that Snap could benefit in the current quarter from easy comparisons to a year-ago period that saw a pandemic-driven ad slowdown. And it isn’t unique to expect that the company could capitalize on an acceleration of ad spending as sluggish categories like travel and entertainment kick-start their marketing efforts as the economy rebounds. But Nathanson is also excited about factors unique to Snap and its product traction.

“In reality, as Snap’s user base starts to engage in the real world again, there will likely be an increase in Snap’s monetizable inventory just as all in- home linear impressions start to fall,” he wrote, while reiterating a buy rating and $80 price target.. “This perfect setup is only enhanced by the improvements that the company has made in its monetization and product innovation efforts, which show continual new [daily-active-user] growth and higher [average revenue per user].”

Wells Fargo analyst Brian Fitzgerald wrote that Snap still faces risks from changes Apple Inc.

is making to ad-targeting capabilities, which likely influenced Snap’s second-quarter outlook that he deemed “conservative.”

He remains upbeat about the company’s potential, however, pointing to positive signs such as Snap’s disclosure that its Android user base was now greater than its iOS user base. A few years back, Snap’s lackluster Android app was holding back user growth and served as a key source of concern from investors, but Snap has since improved that experience in a way that seems to be paying off.

Android is the operating system run by Google-parent Alphabet Inc.

while iOS is the operating system used in Apple’s iPhones

Fitzgerald cheered other dynamics as well: “We remain bullish given strong usage/engagement trends and ample monetization runway across an array of dimensions (increasing ad relevance, new formats, increasing [augmented reality] adoption, increasing share of e-commerce and gaming activity on platform, and narrowing the domestic/international monetization gap).”

He has an overweight rating and $91 price target on the stock.

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Bernstein’s Mark Shmulik cheered the company’s financial progress in a note titled “This one’s for the pension funds,” as he reiterated an outperform rating and $80 price target.

“One for the value investors, Snap delivered [positive free-cash flow] for the first time in its history led by improving cost efficiencies in infrastructure and cash conversion cycle,” he wrote in a note to clients.

Snap shares have gained 287% over the past 12 months versus a 48% rise for the S&P 500
but Shmulik still sees opportunities for the shares to head higher.

“We’re confident in the durability of user and revenue growth for the next several years as international expansion and new features drive incremental engagement while an improving ad product, growing advertiser base, and options around e-commerce and licensing still offer investors the chance to dream the dream,” he wrote.

Monness, Crespi, Hardt & Co. analyst Brian White took a more measured view. “Although Snap has improved its operational execution, introduced promising, new innovations, and enhanced its ad tech stack to capitalize on an improved digital ad spending environment, valuation is not for the faint of heart,” he said in a research note while maintaining a neutral rating.

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