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Alex Cho

Snap Inc. Price Target Initiated at $27 Over at Goldman Sachs

Heath Terry from Goldman Sachs initiated his price target/recommendation on Snap Inc. today. The analyst initiated his price target at $27 and a buy rating, which suggests the consensus range on price target revisions is likely to hover at around $25 to $30 given enough time.

Here were the key highlights from Terry’s commentary at Goldman Sachs:

Snapchat DAUs increased 48% yoy in 2016. North America DAUs increased 42%, Europe by 53%, and the rest of the world by 63%. We expect the company to invest in sales and marketing to drive adoption and improved monetization. We expect S&M investment to increase from $124mn in 2016 to nearly $350mn in 2017 and over $1.6bn in 2021. We expect ARPU to grow more rapidly than DAUs for the foreseeable future.

Our sensitivity analysis assumes DAU growth ranging from a 5-year CAGR of 2% to 11% through 2021 vs our base assumption of 10%. For monetization, our sensitivity analysis assumes an ARPU range of $5 to $65 in 2021 vs our base assumption of $37. For context, we estimate a weighted average (across North America and Europe) 2017 ARPU for Facebook approaching $60, while we estimate Twitter’s US and International ARPU figures at $42 and $9, respectively.

I’m also optimistic on monetization ramp, as I expect Snap’s ad-load to increase correspondingly with its ability to onboard users at a reasonable growth trajectory. The problem with investor perception hinges on valuation, but when operating off reasonable discount rate/multi-year growth assumptions, the consensus is shifting upwards on valuations.

Heath Terry’s value model disclosed in greater detail:

Our $27, 12-month price target is based on 18X 2018E EV/Sales. On a growth-adjusted basis, SNAP is currently trading roughly in line with peers, Alphabet, Facebook, Twitter, Amazon, and Netflix (Exhibit 38). Our price target implies a slight premium on a growth adjusted basis, which we believe is warranted given our belief that there is potential upside risk to our near-term fundamental estimates, as well as the sustained hyper-growth that we expect over the next several years.

Upon reviewing my financial model assumptions, I too will publish a price target on Snap Inc. For now, I maintain my hold rating, but generally believe recent positive commentary is more fairly reasoned than the initial recommendations made by investment bank analysts in the past month.

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