Needham initiated coverage on Snap with an underperform rating, citing the competitive threat of rivals copying its innovations. "We believe SNAP has the most innovative culture on the internet today. The problem is that we believe SNAP shareholders pay in full for its missteps, but don't benefit from the upside of SNAP's genius because competitors can roll out SNAP's best ideas to larger user bases virtually overnight," analyst Laura Martin wrote in a note to clients Monday. "Every time SNAP proves that something works, Google, Instagram, WhatsApp, Facebook and others can copy it." Snap shares are up 59 percent from its Thursday $17 IPO offering price as of Friday's close. Martin cited six key reasons for her negative stance: "1) SNAP's total addressable market (TAM) … is 80% smaller than FB's; 2) SNAP already has 50% penetration of its TAM in the US; 2) SNAP has no ability to prevent "fast followers" from stealing its best ideas; 3) Our $3.3B revenue estimate in 2019 requires SNAP to have a 14-16% share of Adjusted Mobile or Adjusted Digital Ad spending by 2019, up from 2% in 2016; 4) Even if SNAP grows revenue 8-fold to $3.3B by 2019, its share price would decline based on FB & GOOG EV/ Sales ratios; 5) no clear path to profitability before 2020; and 6) the academic literature suggests poor first-year performance." The analyst estimates Snap's value is $19 to $23, representing 15 percent to 30 percent downside from Friday's close. "Snap's value is not backed by patents. Instead, its value is created by employees and users, mostly under 34 years old. Young users (i.e., SNAP's core audience) are often fickle and faddish. If they desert SNAP for a new app in 3 years, it is unclear what SNAP will be worth," she wrote. — CNBC's Michael Bloom contributed to this story. Disclosure: CNBC parent NBCUniversal is an investor in Snap .
