Analyst: Amid Low Expectations, Investors Should Be Encouraged By Snap's Execution

Snap Inc (NYSE: SNAP) shares are surging after a surprise fourth quarter earnings beat that saw encouraging daily active user growth. Despite topping low expectations, one analyst  says investors should be encouraged by Snap's execution.

The Analyst

Canaccord Genuity analyst Michael Graham maintains a Hold rating on Snap, but raised his price target from $12 to $16.

The Thesis

Snap delivered solid fourth quarter results that saw daily active users grow 18 percent year over year, beating consensus for the first time in the company's public history.

Even more encouraging was revenues and gross margins solidly ahead of consensus estimates, said Graham. Over 90 percent of snap ads were delivered programmatically, up from just 20 percent in the first quarter.

While expectations were low, Graham says investors should gain confidence from Snap’s execution. The company made significant progress on enhancing the user experience, particularly around the android version and early feedback received from the app redesign. The refreshed app is currently available to 40 million users, and will be fully rolled out by the end of the first quarter.

Significant questions for 2018 remain for the embattled social media company. Snap is still unprofitable and some of the ad strength was seasonal. Guidance discussions from company management calls for decelerating growth and continued advertiser traction will be important said the analyst.

“Management highlighted that advertiser density is the key variable for 2018, following a 70 percent year-over-year decrease in overall Snap Ad pricing,” Graham said.

Specific headwinds include rolling off of Q4 seasonal strength, lapping of Spectacles revenue, and transition of additional ad inventory (creative tools ) to programmatic, the analyst said.

Price Action

At time of publication, Snap shares were up 37 percent at $19.38. The stock is still lower by about 20 percent from its IPO.

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