02:05 PM EDT, 09/20/2024 (MT Newswires) -- Snap (SNAP) is likely to see near-term growth led by direct-response advertisements, though brand advertising is expected to be "an overhang" on the social media platform's overall growth, B. Riley Securities said in a note e-mailed Friday.

The addressable market for the core advertising business of the parent of social-media app Snapchat is currently estimated at approximately $800 billion, according to the brokerage. B. Riley projects 2024 global ad spend at $1 trillion, with the US accounting for $371 billion, reflecting 10% year-over-year growth. "We believe that Snap's sizable audience uniquely positions the company to generate significant advertising and subscription revenue and to increase profitability," B. Riley analysts Naved Khan and Ryan Powell said in a note to clients.

The company's direct-response ads, which account for about two-thirds of total ad spending on the platform, returned to positive growth in the second half of last year and saw a double-digit pace of gains in the first half of 2024, according to B. Riley. The brokerage attributed the performance to factors such as the deployment of new advertiser tools and capabilities, and new ad formats.

Brand ads, which account for the remaining one-third of the total ad spend, have continued to be relatively weak in recent periods, including in the second-quarter, which was affected by weakness in certain consumer discretionary categories, according to the note.

"We believe that the proliferation of competitive ad formats on other social platforms, along with the popularity of short-form video platforms such as TikTok, YouTube ( GOOG ) shorts, and Facebook Reels, and the rise of (connected TV) advertising may have also contributed to tepid brand ad revenue growth at Snap," the analysts wrote. TikTok and YouTube ( GOOG ) are owned by ByteDance and Alphabet (GOOG, GOOGL), respectively, while Facebook is owned by Meta Platforms ( META ) .

Growth in ad-supported streaming on Netflix ( NFLX ) and Amazon.com's ( AMZN ) Prime Video could be contributing to "incremental softness" in brand ad spending growth on Snap and other platforms, Khan and Powell said.

The brokerage initiated coverage of Snap with a neutral rating and an $11 price target. The company's shares were down 0.7% in Friday afternoon trade and have lost nearly 41% in value so far this year.

North America, the company's largest and highest monetizing market, is seeing an improvement in time spent, which is expected to result in higher monetization. B. Riley said it expects user growth and engagement to continue to rise across Snap's markets outside of Europe and North America over the near term. The Snapchat+ subscription service likely has potential for "continued healthy growth" in the near term, according to the note.

"Arguably, a pickup in North American time spent and monetization gains from ad platform improvements could drive potential upside to our estimates, but it is hard to predict the magnitude and timing," Khan and Powell said.

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