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==Industry context and revenue growth potential== '''Total Addressable Market for Snap''' We estimate the size of the global digital ad market at $206bn in 2017, growing to $300bn in 2020. We expect mobile digital advertising to account for $109bn in 2017, growing to $206bn in 2020. Based on SNAP’s 2016 reported revenue of $404mn, and our 2017 estimate of $980mn, SNAP had 50bps of global mobile advertising market share in 2016 and we expect it to grow to 90bps of global market share in 2017 (Exhibit 26). Snap plans to focus its growth efforts on geographies with mature ad markets and developed infrastructure, however. According to IDC, The United States, Japan, UK, Germany, France, Australia, Brazil, Canada, and Italy accounted for nearly 60% of total ad spending in 2016, and roughly 2/3 of mobile ad spending. China is the 2nd-largest ad market in the world, but Snapchat remains banned, removing that market from Snap’s addressable total. We believe that digital advertising, and mobile advertising in particular, will continue to gain share of ad budgets, as advertisers increasingly look to leverage targeting, measurement, and reporting capabilities that are less mature in other media like TV and radio. Our analysis of population data across North America and Europe (Snap’s primary target geographies) shows nearly 750mn potential users. We leveraged data from Nielsen and eMarketer for smartphone penetration and Facebook’s penetration by age group to further refine the analysis. We assume in an ideal scenario, Snap could match Facebook’s age group penetration and capture 87% of the 12-24 age group, 84% of the 25-44 age group, 71% of the 45-64 group, and 37% of the 65+ group, in the long term. This limitation still results in nearly 500mn potential users for Snap – implying a current user penetration rate of 26% as of 4Q16. We believe Snap can grow its user base across North America and Europe to a combined ~200mn by 2021, which would imply 43% penetration. '''Competition''' In recent months, several of Facebook’s subsidiaries have launched products that emulate many of the key features of Snapchat. Instagram Stories launched in August 2016, allowing users to capture images and video, edit them and share in exactly the same way they would on Snapchat Stories. Instagram Stories also disappear after 24 hours. Facebook reported on its 4Q16 call that Instagram Stories had scaled to 150mn DAUs by December. In February 2017, WhatsApp provided an app update that enabled the sharing of ephemeral content that would disappear after 24 hours in its WhatsApp Status feature. In March, Facebook Messenger followed suit, introducing Messenger Day, which allows users to post pictures and videos which will be deleted after 24 hours. In addition to Facebook’s various platforms, Snapchat competes for user time and attention with other platforms like YouTube, Line, and WeChat, though the latter two will only impact Snap’s growth in Asian markets, in our view. We believe competition will continue to be one of the key points of focus for investors. As competitors increasingly focus on replicating Snapchat’s key features, Snap will have to maintain an aggressive pace of innovation in order to maintain a competitive advantage over larger social platforms like Facebook and Instagram. However, there is some data that reinforce the supposition that the slowdown in 3Q16 was temporary. While the company will only report DAUs on the basis of a quarterly average going forward, Snap has disclosed monthly DAUs under the end-month methodology for historical periods. When examined under the end-month methodology, net adds actually increased qoq in 4Q (Exhibit 29), lending credence to the idea that temporary technical issues had more to do with the slowdown than competition. We believe the 1Q17 DAU figure will be critical to determining more conclusively what the impact of increased competition has on Snapchat’s user base, particularly given the additional competitive announcements seen in the quarter.
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