Snap Poised for Stellar Growth – Jefferies

Snap is set for rapid growth, according to a new report from investment bank Jefferies. Titled No Filter Needed - This Growth Picture Not Disappearing, the report states "Snap looks well positioned for growth as advertisers clamor to serve ads to its large audience of deeply-engaged users, many of whom are in the attractive millennial demographic and are located in high-value ad markets."

It should be noted that Jefferies & Company Inc. was joint co-manager of Snap's IPO.

In the report, Jefferies analyst Brian Fitzgerald points out that Facebook's ARPU is currently nine times higher than that of Snap Inc. , and he anticipates that this gap will narrow in coming years, leading to sharp revenue growth for Snap. Fitzgerald's model assumes that by 2018, Snap will achieve North American ARPU of $19.55 (compared to $79.50 for Facebook today), and European ARPU of $14.10 (compared with Facebook's current ARPU of $25.69).

In building these estimates, Fitzgerald took into account Snap's sizable audience of 158 million daily active users (DAU). He also felt Snap's decision to outsource its infrastructure to Google and Amazon will allow it to scale rapidly without requiring major capital investment, and anticipates that the company will be profitable in 2019.

A major driver for the company's growth is the growth of the mobile advertising market. As a mobile app, Snap is well positioned to benefit from the approximately $90 billion in revenue Fitzgerald expects US mobile advertising to generate in 2020. And globally, this figure is expected to grow to almost $200 billion. He anticipates Snap will generate $3.7 billion over the next four-and-half years (compared with Facebook's $23.5 billion over a similar stretch). (See It's Mobile or Bust, Says Ooyala's Global Video Index.)

Other reasons for Jefferies' positive expectations include high engagement levels among Snap's enviably young user-base: Snap's 158 daily users use the app more than 18 times, spending 25-30 minutes on it, every day. Snap has also taken the decision to target only high-value advertising markets rather than spread its infrastructure cost too widely. Approximately 60% of Snap users come from the top ten advertising markets in the world, which account for 85% of global mobile advertising spend. (See TV Shows, in a Snap!)

Compared with Facebook's ARPU and growth metrics, it does seem that Fitzgerald's estimates are reasonable -- even conservative. However, using Facebook as a proxy has an issue: Its growth was far from typical.

Even in Facebook's early years there were questions about the company's ability to maintain its growth trajectory and effectively monetize its audience. Facebook was able to deliver, but there have been many others who did not. The wrong ad formats, overly intrusive advertising or even downturns or blips in macroeconomic conditions can all derail a young ad-dependent company's growth story. Equally important is Snap's ability to maintain its user growth and engagement metrics: Any changes there, and Snap will probably vanish faster than its messages.

Snap also has chosen to create an unusual shareholding structure, with no voting rights for shareholders. This denies investors input into the company's affairs. It has even drawn regulatory scrutiny in the US, and calls from institutional investors to keep Snap out of stock indices.

With the SEC missing three out of five commissioners currently, it's unlikely we will see a ruling in the near future. But in the longer term, Snap's shareholder voting structure could create problems. It could also affect investor enthusiasm from both individual and institutional investors.

Still, overall Fitzgerald paints a compelling picture for the company's prospects. If anyone is to challenge Facebook's domination of the youth audience, Snap appears to be the most likely candidate today.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation