3 Key Questions Snap Execs Need To Answer

Snap Inc SNAP, which reported its second quarterly earnings as a public company, has to start answering some hard questions posed by people who invested in the Snapchat social media platform, analysts say.

Snap reported that daily active users were up by 7.3 million people from last quarter, an increase of 4 percent for a total of 173 million. Revenue also was up, but the amount of money it lost was more than double that.

Here are three critical questions posed by UBS analyst Eric J. Sheridan and his take on the answers.

3 Posed Questions

1. Can Snap scale to 250 million daily active users in the next three-plus years?

"Likely. We estimate Snap's DAU base to exceed 250 million in FY'19. We believe continued product & user experience improvements coupled with Snap's content strategy will produce solid near-term user growth. Over the medium/long-term, the debate will likely rise/fall on how Snap increases its penetration of the 35+ year-old demo in developed markets, fending off a highly competitive environment."

Related Link: Snap Investors Were Sold Snake Oil

2. Can Snap achieve ad monetization of $5 billion–10 billion of revenues in the next 3–5 years?

"Potentially. Snapchat remains under-monetized vs. other social media/messaging peers considering the scale of its user base and levels of time spent/engagement. We believe Snap's current ad products provide a compelling value proposition (e.g., engaged audience, full screen video, sound-on) for advertisers translating into a 63%+ rev CAGR ('16-'21). We believe that hardware remains a call option for now."

3. When will Snap's operating leverage allow the company to become profitable?

"By 2020, we expect Snap to turn Adj. EBITDA & FCF positive. Snap's unique cost structure (hosting costs in COGS vs. capex for peers) drives near-term margin pressure but allows for significant leverage in outer years from ad monetization growth against a flattening cost curve."

Snap was trading at $12.18 on Friday, down 11.29 percent. Sheridan’s price target was $12 and he rated the stock Neutral.