We are raising our near-term rating on Snap Inc. (SNAP) to "buy" from "hold" on ongoing growth in daily active users and revenue, along with more attractive valuations, suggests Jim Kelleher, a leading analyst with the independent Wall Street firm, Argus Research.

Snap Inc. operates the social networking site Snapchat, which allows users to post, view, and interact with videos and still images. Snap has added text-, video- and voice-based calling between users.

The company sells advertising in the form of sponsored geofilters, publisher stories, snap ads shown between user stories, and sponsored lenses. Given the richer context and information furnished by images, Snap’s goal is to reinvent the camera to improve how people live and communicate.

Snap’s fundamentals have not been negatively impacted by the coronavirus outbreak or by steps taken by governments to limit public assembly. Arguably, this period of recommended or enforced physical separation could drive more users to digital social media platforms such as Snapchat.

In February, Snap reported strong underlying results to close its calendar 2019 year. Revenue of $561 million was up 44% year-over-year and 26% sequentially. For all of 2019, revenue of $1.72 billion was up 45% from $1.18 billion in 2018.

For 4Q19, Snap’s daily active users (DAUs) rose 17% annually to 218 million, and were up by 4%, or by 8 million DAUs, on a sequential basis.

The quarter featured particularly strong growth in Rest of World (30% of users), where the number of DAUs rose 37% year-over-year. We regard this as a relatively untapped advertising monetization opportunity.

Snap guided for revenue in the $460 million range for 1Q20, indicating 40% annual growth at least in the early part of 2020. Snap’s rebuilt app for Android phone users, which moved from beta to full deployment in 1Q19, remains a key usage driver and, in turn, a revenue driver, particularly in Rest of World.

There is a risk that we are getting in too early on SNAP shares. However, we believe the coronavirus is likely to drive more, not less, traffic to the Snapchat site, resulting in modest growth acceleration.

We had been looking for a favorable entry point for SNAP, and non-fundamental weakness in the stock due to the coronavirus panic presents such an opportunity, in our view. On that basis, and given a much lower entry point, we are raising our near-term rating to "buy".

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