Snap's First Buy Rating Is Bizarre

Snapchat operator Snap (NYSE: SNAP) finally scored its first buy rating from a Street analyst. Monness Crespi Hardt analystJames Cakmak is the first to give Snap such a rating (via Tech Trader Daily), and Cakmak has assigned a $25 price target on shares. That's about 20% higher than current prices, which are hovering right around $20 as of this writing, and comparable to the $24 that Snap opened at on its first public trading day.

The analyst makes the case that Snap is "one thing: a software-enabled portal." This characterization begs the question: a portal to what?

Snap Spectacles. Image source: Snap.

Cameras haven't advanced much in over four decades?

Snap is better at aligning its ad products to its users' experiences, in Cakmak's view, which he does not believe is true of other social media platforms. The company is able to iterate on cameras with software; the analyst believes that the camera has seen "minimal advances since the invention of the digital camera by Eastman Kodak in 1975." That's a remarkably bizarre assessment, since digital cameras have progressed significantly over the past four decades.

Perhaps more importantly, Snap's software leverages all of the innovation that smartphone manufacturers put into their shooters, so it has contributed next to nothing to moving camera technology forward in terms of hardware. And it's not like the company's newer Spectacles are paragons of innovation; they use fairly mediocre image sensors embedded into sunglasses.

Cakmak believes Snap has immense opportunities in premium content, where Snapchat is comparable to "channel surfing" but with short-form premium content instead of traditional television. But the analyst fails to acknowledge that many social media platforms are prioritizing short-form visual content -- rivals that are better funded and more financially stable.

Snap's rapidly decelerating user growth has been compared to Twitter's, but Cakmak does not believe the two companies are comparable. The analyst says that Twitter is in the midst of an "identity crisis." But isn't that precisely where Snap now finds itself as it attempts to transition from a "storytelling company" to a "camera company"? Overall, Cakmak sees a paradigm shift in mobile video, and thinks that Snap has an advantage.

Steer clear of Snap shares

As far as the above question on where this portal leads: "the portal takes users to a decision tree on what to make of the captured memory." But that's a decision that users have to make any time they capture a photo or video that's worth sharing or saving, irrespective of Snapchat.

The underlying rationale for the bullish rating doesn't stand up very well to scrutiny. Cakmak expects Snap revenue to soar to $4 billion by 2019, but the analysis doesn't explain how Snap will get there. Much of the ad spending that occurs on Snapchat is largely experimental as advertisers test relatively new waters in an attempt to reach younger demographics (a notoriously difficult demographic for advertisers to reach). Snap is new to actually operating an advertising business, so its execution is fraught with uncertainty.

Meanwhile, the likelihood of Snap independently innovating on camera hardware in a meaningful way is remote; more probable is a scenario where Snap remains beholden to smartphone cameras.

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Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends TWTR. The Motley Fool has a disclosure policy.