Snap just got an upgrade, but analysts warn TikTok is a looming risk in the fight for ad dollars

Evan Spiegel, co-founder and CEO of Snapchat

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Bank of America Merrill Lynch analysts upgraded Snap to a buy on Friday, but warned that the rise of social media rival TikTok could be a risk to the call.

TikTok, which is owned by Beijing-based ByteDance, is a mobile app on which users can share and easily edit short videos. Across its suite of apps and around the globe, ByteDance now says it has 700 million daily active users. Meanwhile, Snap said its user base grew to 203 million daily active users in July when it reported second-quarter earnings.

In a research note Friday, Bank of America analysts outlined reasoning for the upgrade, but listed this as one of the risks: "Pressure from TikTok" appears to be behind a decline in monthly users on Snapchat, implied by figures in its Ads Manager, they wrote.

Analysts said investors have raised concerns over the competitive threat TikTok presents to Snap, but said consumers use Snap and TikTok for different purposes.

"In our view, many consumers use both applications interchangeably for different use cases, Snap being a private, community driven messaging and professional content platform and TikTok being a 'viral' short video sharing application," they wrote. "In our view, the current TikTok interface, which consists of mainly 'viral' short-form video does not pose a significant threat to Snap's use case."

However, the analysts wrote, "We think there is some risk of TikTok making product changes that move closer to Snap's core functionality, and TikTok will likely compete for ad dollars."

Snap is scheduled to report third-quarter earnings on Tuesday.

Debra Aho Williamson, principal analyst at eMarketer, said in an emailed comment that Snapchat will start to feel more competition for user time and attention from TikTok, if it hasn't already.

"Both apps feature vertical, short, user-generated videos. Although teens use the apps in different ways, the allure of watching and creating TikTok videos is currently very strong in this demographic group," she wrote.

But Snap is making a strong effort for ad dollars with new updates like dynamic ads, which Williamson said appeal to performance advertisers and help put Snapchat's ad offerings to a closer level with Facebook's.

"However, the competition for ad dollars is intense. Facebook and Google still control most of the digital ad market, and new entrants like TikTok are catching interest among advertisers," Williamson wrote.

Disclosure: CNBC parent NBCUniversal is an investor in Snap.

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