Investors should buy Snap shares because the social media company's fundamentals should keep improving, according to RBC Capital Markets analyst Mark Mahaney.
"Return to growth in [daily active users] could spark re-acceleration in revenue. When coupled with ongoing gross margin expansion and operating loss reduction, we see the potential for a positive inflection point catalyzing SNAP shares," Mahaney wrote in a note to clients Friday.
Mahaney upgraded the stock to outperform from sector perform and hiked his 12-month price target to $17 a share from $10. The new price target implies a 44% upside from Friday's close of $11.84.
Snap shares were up nearly 4% on Monday.
Snap shares have been on fire this year, rising more than 100 percent. By comparison, the Invesco QQQ Trust — an ETF that tracks the biggest stocks in the tech-heavy Nasdaq 100 — is up 19.7% in 2019. Meanwhile, Facebook shares are up 34.1% this year.
"The recent stock recovery has been driven by the potential for a fundamental inflection point … and a much-less demanding valuation," Mahaney said.
The analyst also noted the company's app, Snapchat, is gaining traction among Android users after a series of improvements. He also said "long-standing monetization upside potential may now be unlocked" for Snap as its self-serve ad manager gains popularity, users engage with advertising on Snapchat and the company ramps up its Premium Content advertising.
"SNAP's monetization potential has been part of the Bull Pitch since the IPO. And that potential remains significant, with Snap generating one-third of TWTR's monetization (in terms of Global Ad Revenue per DAU) and one-fifth of FB's monetization. What is key is that SNAP has been showing a nicely improving monetization level over the past two years," Mahaney said.