Last Thursday, March 2, shares of Snapchat parent Snap Inc. (SNAP) went public at $17, well above the $14-$16 initial public offering range. The shares hit a high of $29.44 on Friday morning before closing the week out at $27.09. That quick gain of just under 60 percent was great for investors that were involved with the IPO, but it wasn’t quite the same for investors that entered into SNAP shares after the shares started trading on Thursday morning.

With SNAP shares now trading in the secondary market and the buildup of the IPO now behind us, the question to us is are SNAP shares really worth the current $34.7 billion in market capitalization? As spelled to out in the S-1 filing, Snap’s Snapchat is free and the company generates revenue “primarily through advertising” the same way Facebook (FB) and Twitter (TWTR) do. 

Actually, that’s not THE question, but rather one of the key questions as we contemplate. Is there enough upside to be had in SNAP shares from current levels to warrant a Buy rating? Odds are that the IPO underwriters, which include Morgan Stanley (MS), Goldman Sachs (GS), JPMorgan Chase (JPM), and Deutsche Bank (DB), that reported $85 million in fees from the transaction will have some favorable research comments on SNAP shares in the coming weeks.

While SNAP shares fit within the confines of our Connected Society investing theme and are likely to benefit from the shift in advertising dollars to digital and social media platforms like Facebook and Alphabet’s (GOOGL) Google and YouTube, our charge is to question using our thematic 20/20 foresight to see if enough upside in the shares exists to warrant placing them on our select List?

Boiling this down, it all comes down to growth

The question when looking at Snap is: Can it grow its revenue fast enough and deliver positive earnings per share so we can see at least 20 percent upside in the shares?

Well, right off the bat the company’s user base of 158 million active daily users was relatively flat in the December quarter and grew just 7 percent between 2Q 2016 and 3Q 2016. Assuming the company is able to continue to grow its user base, something that has eluded Twitter for the most part, it will still need to capture a disproportionate amount of the mobile advertising market to hit Goldman Sach’s calls for Snap to increase its revenue fivefold by 2018.

Snap recorded $404.5 million in revenue last year, up from $58.7 million in 2015, and a fivefold increase would put 2018 revenue at more than $2 billion. IDC projects that mobile advertising spend will grow nearly 3x from $66 billion in 2016 to $196 billion in 2020, while non-mobile advertising spend will decrease by approximately $15 billion during the same time period.

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