Although shares of Snap Inc (NYSE: SNAP) have appreciated by 21% over the past month, the company’s prospects for revenue growth and margin expansion appear underappreciated, according to UBS.
The Snap Analyst
Eric Sheridan upgraded Snap from Neutral to Buy and raised the price target from $16 to $24.
The Snap Thesis
Snap is likely to exit 2019 with ad revenue and user growth, and this momentum is likely to persist in 2020 and beyond, Sheridan said in the Friday upgrade note. (See his track record here.)
Channel checks and proprietary surveys indicated strong year-on-year growth in usage and ad conversion, while industry checks pointed to “solid momentum for ad budget allocation and potential tailwinds for pricing on Snap's platform over the medium term,” the analyst said.
UBS expects Snap's advertising revenue to grow at a compounded annual rate of around 28% between 2019 and 2024, with growth of 39% in 2020 and 33% in 2021.
Continued topline momentum — driven by higher ad pricing and Snap’s cloud costs strategy — could have a disproportionate positive impact on both gross and operating margins as the business scales, Sheridan said.
A renewed management focus on driving user growth and ad monetization could "produce multi-year revenue growth even above our newly raised forecasts," the analyst said.
Snap Price Action
The stock was trading 4.19% higher at $19.02 at the time of publication Friday.