Snap Inc (NYSE:SNAP) stock soared on Tuesday after receiving an upgrade, not to Hold or Neutral, but to Overweight, an equivalent of Buy. However, the rally was short-lived, as the stock reversed course in after-hours trading, so the Snap stock upgrade didn’t put enough gas in the tank to keep it roaring.
Barclays issues Snap stock upgrade
In a note to investors, Barclays analyst Ross Sandler said he upgraded Snap stock to Overweight after being on the sidelines since the initial public offering earlier this year. He feels that now would be a good time to start buying shares because his math suggests 2018 will be much kinder to the social media firm. He looks for Snap to start meeting or beating consensus estimates for revenue next year and accelerating its growth.
In fact, he sees upside to estimates as early as the fourth quarter of this year. Revenue consensus stands at $253 million, which implies a growth rate of 22% year over year. He explained that seasonality for mobile display ads is a 30% quarter-over-quarter increase across the entire industry, and he feels that Snap should take share.
Is consensus too conservative?
Assuming that 95% of ad impressions go through the auction platform on Snap and there isn’t much change to reserve or auction pricing compared to where it stood in the third quarter, Snap needs a 60% sequential increase in impressions to meet the consensus. That’s in line with the impression growth observed in the third quarter, he notes. Because of fourth-quarter seasonality, he feels that it’s conservative to expect the same growth rate as what the company recorded during the third quarter.
He expects the transition to auctions to be complete by the first quarter, which is why he expects next year to be brighter for Snap. He also points out that short interest is exceptionally high, and its founders own about half the company.
Snap versus other social media
Another reason for his Snap stock upgrade is because he expects next year to shift the narrative around the company from Facebook is killing it to it can coexist with Facebook. He believes the redesign of Snapchat could help grow the company’s user base. Additionally, he noted that Instagram and Twitter both saw big benefits from their change to using algorithms to rank content, and he expects Snap also to benefit.
Sandler described the engagement on Snap as “best in class” at 25 sessions per daily active user and more than 30 minutes per day. He added that “hyper-users” in the West have boosted engagement on Snap, although it has struggled in “lower-end Android markets.” Nonetheless, he expects the app redesign to help it turn things around in those markets.
Following the Snap stock upgrade, the shares closed up 10% on Tuesday before slumping by more than 1% in after-hours trades.