Why Snap Could Be the Next Big AR and AI Investment

lovely | March 28, 2024

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Snap Inc. (NYSE:SNAP), the entity behind the immensely popular Snapchat app, has experienced a whirlwind of market activity, making it the most dynamic name in the social media landscape. Despite a recent setback following its fourth quarter earnings report for 2023, which did not meet the loftiest of Wall Street predictions, the company’s substantial subscriber growth paints an optimistic picture for its future. With the stock currently sitting approximately $6 below its annual peak, the scene is set for a rebound fueled by continued user engagement and strategic initiatives.

The fourth quarter of 2023 saw Snap’s revenues climb by 5% year-over-year, hitting $1.36 billion, albeit slightly below the expected mark by $20 million. This was in stark contrast to its competitor Meta Platforms (META), which reported a substantial 25% growth. Additionally, the company’s guidance for the first quarter of 2024 left some investors wanting more, with projections including daily active users (DAUs) around 420 million and revenue growth estimated between 11% and 15%. This guidance indicated a modest sequential user growth and a revenue forecast that didn’t quite reach analyst expectations of $1.2 billion.

Despite these perceived setbacks, it’s crucial to focus on Snap’s growth trajectory rather than temporary fluctuations against analyst forecasts. The company is on a path to recovery, aiming for a resurgence in double-digit revenue growth rates after a period of slowdown attributed to broader market challenges and significant privacy changes by Apple (AAPL) impacting its advertising model.

Snap’s efforts to diversify its revenue streams have led to the establishment of a promising subscription model. By the close of 2023, Snapchat+ boasted 7 million subscribers, each contributing $3.99 monthly for exclusive features. This base represents a significant leap towards the company’s ambitious target of doubling its subscriber count to 14 million by the end of the year, equating to merely 3% of its DAUs.

Financially, the subscription segment alone has the potential to substantially augment Snap’s revenue, especially if the company decides to increase the monthly subscription fee. An adjustment to $5 per subscriber could see annual revenues from Snapchat+ soar to $840 million, should the 14 million subscriber goal be achieved. This adjustment underscores Snap’s potential for increased monetization and its strategic positioning within augmented reality (AR) and artificial intelligence (AI) innovations.

The current market valuation of Snap, especially in comparison to peers like Meta Platforms and Pinterest (PINS), suggests an attractive entry point for investors. The company’s stock trades at a relatively modest multiple, below 4x EV/S, reflecting a discount that may not fully appreciate its growth prospects or its strategic adjustments, including workforce optimizations intended to streamline operations and enhance productivity.

Snap’s journey through 2023 and into the first quarter of 2024 is marked by ambitious adjustments aimed at steering the company towards profitability. Despite forecasting an adjusted EBITDA loss for the first quarter, attributed in part to workforce reductions, the company’s operational efficiencies and cash flow growth signal a robust foundation for future profitability. With Snap poised to exceed $5 billion in revenue and eyeing a substantial increase in subscription revenues, the current valuation presents a compelling case for investment consideration.

In conclusion, Snap’s journey reflects the intricate balance between navigating market expectations and executing on long-term growth strategies. With a keen eye on diversification, technological innovation, and operational efficiency, Snap Inc. offers a unique proposition for investors looking towards the evolving landscape of social media and digital engagement. The dip in its stock price, rather than signaling a red flag, presents a ripe opportunity for those looking to invest in a company with a clear vision for growth and an expanding arsenal of user engagement tools.