Should You Be Taking Snap Inc Growth Estimates at Face Value?

By Motley Fool Staff Markets Fool.com

Many analysts project thatSnap(NYSE: SNAP)will grow its user base significantly in the coming years. Should investors be equally confident in the company's prospects?

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Motley Fool analyst Dylan Lewis asks senior Fool.com technology specialist Evan Niu to run through some of the numbers in this video as they stress why it's more important to ask how Snap will achieve that growth. They also examine one of the most significant risks the company faces in terms of expansion.

A full transcript follows the video.

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This video was recorded on March 31, 2017.

Dylan Lewis:One of the things that both of us were a little worried about when we were looking at the IPO was user growth. They're at about 160 million daily active users now, like I said, up just 3% sequentially from the previous quarter. That was 48% year-over-year growth, though. One of the things I saw in some of these research notes was some user growth estimates. I thought it would be interesting to run through these and see what you think. Cowen estimated that Snap would have roughly 195 million daily actives at the end of 2017, which would be good for 24% year-over-year growth, and would basically be a 5% sequential growth rate for the rest of the year. I actually think that's fairly reasonable.

Evan Niu: All these analysts, all these estimates are just numbers in the spreadsheet. They just plug in these growth estimates. I think the more important question is, how do they actually get there, as opposed to just assuming these numbers on some spreadsheet are all fine and dandy. And that's how all models work, of course, that's what they are. But at the Fool, we tend to think about it more in terms of business on the ground. How are they going to do this? How are they going to grow users, how are they going to grow their ad sales? Because all these models will say, "We expect this number of revenue by 2019 or whenever." But I think there's a lot of uncertainty with Snap's execution going forward, in terms of both ad revenue, trying to grow that, as well as trying to get more users on the platform. I don't know, I think it's a more complicated answer than a lot of these analysts make it seem to be. Does that make sense?!

Lewis: Yeah, I wanted to bring it up to show, this is what a rosy outlook looks like. For growth of the platform, that doesn't seem crazy to me. But, one of the things I am a little bit worried about, we haven't talked about this a ton in our past coverage of the company, I think international growth, particularly in developing markets, is going to be a lot harder for Snap than it has been for some of the other social media companies, because it's such a video-intensive platform.

Niu: Right, that's a good point. Video requires a lot more bandwidth, and a lot of emerging markets don't have a lot of good LTE network bandwidth on the infrastructure side. LTE penetration is quite low in some markets. Which is a challenge for the broader smartphone market to grow in those areas, too. But for Snap specifically, because they rely on higher-speed connections, because the app is so video and photo intensive, yeah, that's another thing that's going to hold them back.

Dylan Lewis has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.