If you bought shares of Snap (SNAP -2.77%), the parent company of social media app Snapchat, when it went public in 2017, you know it's been a bad investment so far. The initial public offering (IPO) priced shares at $17, but they trade below $12 as of this writing -- down roughly 30% over five years. By comparison, the stock market is up nearly 70% in that same period.
Since it has performed so poorly, one might wonder why Snap perennially sits on my radar. The answer is that the company has impressive augmented-reality (AR) capabilities. And recently, Snap's CEO said something about AR to stoke my excitement about the business's potential once again.
Snap is launching an enterprise business
Snap CEO Evan Spiegel wrote a lengthy memo to his employees that was later leaked to the press. As reported by The Verge, Spiegel is setting several goals for his company in 2023 as he attempts to recast its vision during what's proving to be a challenging operating environment.
The entire memo is worthy of discussion, but there's just one point I want to focus on here: Snap intends to launch an enterprise business for AR. Specifically, Spiegel is looking to integrate its AR technology with at least five customers by the end of next year.
Details for Snap's AR enterprise division are slim. However, Snap's try-on AR technology was talked about in the same paragraph as the enterprise division. The try-on shopping tech came out in 2021, and Farfetch and Prada were early testers. With this tech, brands can make their existing product images 3D, and customers can digitally try on the items by uploading a picture.
Then, at the company's Partner Summit earlier this year, Snap announced additional upgrades and revealed new apparel partners.
However, Snap has been giving away this AR tech for free. That makes sense if you're trying to gain adoption. But in Spiegel's memo, he clarified the company is aiming for five paying enterprise customers in 2023. In other words, it's moving beyond the development stage for AR and into the monetization stage. And that's big.
Finally some return on investment for Snap shareholders?
Snap generates most of its revenue by showing advertisements to users of its Snapchat platform. Granted, its AR lenses inside the Snapchat app are a big reason it has 347 million daily active users. But at the end of the day, Snap makes its money with ads, not directly with AR.
By contrast, Snap has been spending money on research and development (R&D) for virtual reality (VR) and AR for years. Additionally, the company has acquired other companies to fast-track its roadmap, including the recent acquisition of neural-interface company NextMind.
It wasn't all spent on AR tech, but Snap invested more than $1.8 billion on R&D over just the past 12 months, more than double its annual R&D budget just three years ago.
Data by YCharts.
To be sure, Snap has developed some of the best AR tech out there at scale, but shareholders need to see some return on the company's investments. The company needs more than just AR tech; it needs AR profits, and the path to AR profits has been unclear.
One of the most obvious ways for Snap to monetize its AR tech is from the metaverse -- an immersive, interactive VR experience. Some analysts think the metaverse trend could be worth hundreds of billions of dollars, but even if that's correct, it will take years to play out and for Snap to tangibly benefit.
Snap is looking for AR profits far sooner than that. Back to the memo, Spiegel also had this to say regarding macroeconomic conditions: "Today, the cost of capital has increased so dramatically that our business will be valued based on our ability to generate profits. We must adapt our strategy accordingly."
Putting it all together, Snap grabbed as much cheap money as it could while it lasted and aggressively built its AR capabilities with little apparent regard to its ability to generate profits. But Spiegel says the strategy is now changing with the changing economy.
A large portion of Snap's strategy shift will likely come from pulling its AR monetization lever via enterprise customers. It's an exciting, underreported development and one I'll be watching with great interest in the coming year.
