Mark Mahaney’s career as an internet analyst started 20 years ago. By his own measure, he has been in the game longer than anyone else in the industry.
He graduated from Wharton in 1996 and has been interested in the internet his whole career. Mahaney is rated as one of the top analysts in the tech sector by Bloomberg and is outperforming his peers by about 6% in total returns over the past year. And Mahaney is bullish on Snap.
He rates Snap as a buy with a $US20 price target. The average, according to data from Bloomberg, is $US15.54, and 67.6% of analysts rate the company either a hold or sell.
Markets Insider caught up with Mahaney to get some insight into his high price target and where he thinks the future of Snap will be. This interview has been lightly edited for clarity and length.
Seth Archer: Do you think Snap can reverse this downtrend, get past the lockups, and move back up to $US20?
Mark Mahaney: I guess so. Look, in all fairness, we initiated coverage of Snap at $US24 with a $US30 price target, so we’ve been dead wrong since we’ve initiated coverage. And we’ve had to lower our numbers materially and lower our price target materially. Both our estimates and our price target have been cut in about a third since we initiated coverage.
If I knew that was going to happen when the stock was at $US24, I wouldn’t have initiated with a buy. Our skill on Snapchat has not been proven; it’s been disproven so far.
But the bull case on Snapchat is they have some of the best product innovation in the space. They can continue to grow their daily average users at a healthy clip, and there is a decent chance we will see that in the fourth quarter of this year or probably in the first half of next year because of new product innovations, like Snap Maps, that they have rolled out.
They’re improving their integration with a wide variety of Android devices. The self-service advertising station that they have rolled out — that takes a couple of quarters to gain traction. It will gain traction. I think you’ll see a stabilisation in that revenue growth. So if that happens, stabilisation, ad-revenue growth, and the daily active users start inflecting up. I think the stock can materially gap higher.
Archer: If I’m an investor who’s been watching Snap plummet, then level off, what is the most important thing I need to know right now?
Mahaney: It’s those two things. The most important thing you need to know you can’t know. The most important thing you need to make a decision on is whether you think they can reaccelerate their user growth and whether you think they can stabilise their ad-revenue growth. Those are the two most important things you need to make a decision on.
Archer: Are there any macro trends fighting the company?
Mahaney: No, I think the macro trends are generally tailwinds. The competitive set here is potentially much tougher and it includes Facebook and Instagram.
Archer: Can you elaborate on Facebook and Instagram? They have kind of overtaken Snapchat in users but maybe not in engagement rates. What does that fight continue to look like? Is there a winner?
Mahaney: Facebook and Instagram are the clear winners. The question is, is there enough room for Snapchat? And whether the value proposition to consumers is different enough for Snapchat that it can also grow. It’s not going to be the size of Facebook, but could it grow to a couple of hundred million daily active users. I don’t think that’s reflected in the stock price — that the daily active users are close to plateauing. I think they can continue to do the level of product innovation that they have done over the past two years. If they can continue to do that, I think that the growth in daily active users can reaccelerate.
I do think that people use these assets differently. The financial markets use [social-media companies] as substitutes for each other, but I don’t think that’s the case. I think people use Snapchat for visual messaging. I don’t think people use Instagram for that. They use Instagram more for entertainment. It’s kind of like the millennials’ Facebook. You use Facebook to kind of share and inform and entertain. You don’t really use it to directly communicate. Snapchat is for direct communication. It happens to be visual communications, and it’s just part of an ongoing trend that we’ve seen from email to texting to visual texting, and that’s where Snapchat is.
Archer: So how does it get those daily active users to start coming to Snapchat?
Mahaney: I’d make the argument that they actually had very good daily-active-user growth last quarter. They grew 4 million, which was an improvement on the 3 million they added in the March quarter, and they did that in what was supposedly a really competitive market. Maybe that’s the evidence that, in fact, it can grow well even in the most competitive North American Facebook-Instagram market.
Archer: What does it look like in five years?
Mahaney: I don’t know. But I think in the next year or two, because of product innovations and fixing some of the Android-integration problems they have had with their application outside of North America and parts of North America, I think it can be materially bigger in terms of their user base with more engagement, and I think advertisers will follow that.
They have got very clever ad units and a really effective tool for reaching not just millennials but all people on what is increasingly becoming the screen of choice: the smartphone.