Shares of the new IPO Snap soared on Monday, now hovering near $24, where it had started earlier this month. The stock had been struggling but stocks for the disappearing messaging app’s parent company was up 3 percent in premarket trading with the stock up more than 14 percent over the past week. Wall Street analysts have now issued the stock a “buy” rating.
Analysts with Goldman Sachs remind that the stock does have a higher risk profile but still has quite a healthy reward potential.
For example, Goldman Sachs analyst Heat Terry—who actually gave the company a $27 price target—comments, “With Snap’s large, valuable, and highly engaged user base generating ad inventory and the monetization path in mobile now well worn, we believe the potential for outperformance as the company continues to innovate against the growing mobile opportunity outweighs those early stage risks.”
Essentially, the market sees Snap as having the potential to create quite an explosive advertising business, stemming mostly from its loyal—and growing—younger user base. The app, of course, is massively popular with Millennials: approximately 85 percent of Snapchat’s 158-million-strong daily user base fall between the ages of 18 and 34. These daily users check in with the app 18 times a day, on average.
Morgan Stanley analyst Brian Nowak notes, “SNAP’s engaged/hard-to-reach millennial users and unique video offerings should attract significant ad dollars.”
And it is this very specific—and subtle—fact that might be the secret of this app’s success. Through the attraction of this younger crowd base, Snapchat could have the ability to sustain healthy growth without having to go as big as its mobile social media peers (like Facebook). Nowak goes on to say, “Snap is not aiming to connect the world but focusing instead on driving high user engagement in monetizable advertising markets.”
At the same time, there is great opportunity for mobile advertising coming from a corporate desire to reach these users. Jeffries analyst Brian Fitzgerald advises, “By 2020 mobile ad spend will be as large as TV ad budgets today,” estimating that corporate spending on mobile advertising will likely surpass $90 billion this year, in the US alone. “This is the opportunity Snap is chasing,” he continues.