Snap Carries 'Significant Risks,' Moffett Nathanson Initiates At Sell - Snap (NYSE:SNAP)

Snap Inc SNAP may be loved by retail investors, but it's becoming the ultimate contrarian play with institutional investors.

Moffett Nathanson initiated coverage on Snap with a Sell rating and $15 price target. The firm believes the “market has officially priced SNAP for perfection” following its IPO. Analysts believe the company will mimic a Twitter Inc TWTR-like trajectory over the net year as opposed from a steady rise from current levels.

While Moffett Nathanson acknowledged Snap’s high engagement and innovation potential, it sees significant risks to the story.

3 Potential Risks Facing Snap

Slowing Daily Active User Growth

“This has been a well-flaggd concern as 2H16 DAU growth slowed dramatically as competitors co-opted SNAP’s best feautres. This is no accident as we think SNAP is near the upper bound of the 13-34 year old core demo in the U.S. and we have concerns that those 35+ wont contribute meaningful engagement.”

Limited Revenue TAM

“We think there’s a limit to ad dollars targeted at SNAP’s key demos. The TAM of TV brand dollars at domestic cable nets which over index to SNAP’s demos is only $7.5bn. Unlike FB and GOOG, direct response and SMB dollars could remain largely out of SNAP’s reach.”

Profitability

While Snap acknowledged this difficulty in its S-1 filing, institutions are still looking for the company to turn a profit before pegging this company as an attractive investment.

“We’ve analyzed the historic profitability of peers and think SNAP’s income statement is going to look a lot more like TWTR than FB," Moffett Nathanson said. "SNAP is years away from turning a profit. It just achieved positive gross margin and there’s no guarantee of GAAP profitability in the next 5 years (or even positive adj. EBITDA). A decade in, TWTR is still in the red.”

Despite the significant risks Snap is exposed to, Moffett Nathanson’s price target is based on ~5x 2020 revenue, still in line with the highest large-cap Internet companies. The company is expected to grow twice as fast as the best in class Internet companies like Facebook Inc FB and Alibaba Group Holding Ltd BABA by 2020.