Shares of Snap (SNAP 2.89%) tanked last week after the company's earnings report, which wasn't great. While Meta Platforms did well with ad revenue showing strength, that wasn't the case for Snap, which saw sales down on a year-over-year basis.
But Snap is undergoing some changes and there was good growth in its user base. Could the tech stock be a buy on this latest weakness and be a good contrarian investment?
Could AI help Snap win over users?
Snap's revenue declined by 7% for the first three months of 2023, falling to $988.6 million. However, at a time when the ad market isn't strong and advertisers are cutting back on spending, this may not come as a big surprise.
What Snap is doing, however, is investing in its platform to make it better for both users and advertisers. One example is My AI, which uses ChatGPT technology. Snap launched it earlier this year.
ChatGPT has been an incredibly popular chatbot. In January, it amassed more than 100 million active users -- after being live for just two months.
But one of the concerns has been around privacy and how OpenAI, the company behind ChatGPT, is using the data from all the queries. Snap currently allows its users to delete anything sent to My AI within 24 hours.
If the tech company can offer its users the functionality of a chatbot while maintaining a high level of privacy, it could give them the best of both worlds. Privacy and disappearing messages are, after all, key features of Snap's social media platform.
Could AR do the same for advertisers?
The company is also making enhancements to its augmented reality (AR) platform. This includes making Snap's AR capabilities available in the world's largest venues by partnering with Disguise, which makes live-event visualization technology. Through the partnership, Snap users can even utilize the AR technology at live music festivals.
These are promising developments that could pay off for advertisers if they're able to reach Snap users at major events at festivals, providing them with more unique ad opportunities. But it could take time to see the full effect of the changes Snap is making. While revenue may down right now, it may not be too long before the company is able to generate better sales numbers.
Snap still has a valuable, growing audience
What's most promising about the business is that it's still getting more users on the platform. As of the end of the first quarter, Snap's daily active users topped 383 million, representing a 15% increase year over year. Snapchat Spotlight, which launched in 2020 and is similar to TikTok and Instagram Reels, has also been doing well, with 350 million monthly average active users during the quarter. This was a 46% improvement from a year ago.
There's also the company's Snapchat+ service, which is another potential growth catalyst for the business in the long run. Launched less than a year ago at a price of $39.99 per year for premium features, it has 3 million paying subscribers thus far.
Is Snap a buy today?
Down more than 70% from its 52-week high, Snap stock could be an appealing bad-news buy right now. The problem is that the company remains deeply unprofitable, with losses totaling $1.4 billion over the trailing 12 months. And with a recession still likely coming this year, it may be a while before the ad market recovers, so as bad as Snap's bottom line is, it could get worse.
Snap is an intriguing stock to buy as it does have some promising growth potential, especially if advertisers move away from TikTok as the U.S. government looks to ban the Chinese-based social media platform. But it's by no means a risk-free investment.
If you're willing to take on some risk and buy and hold this beaten-down tech stock until the economy is in better shape, Snap could be a good investment to hang on to. If you aren't, however, then you're better off going with a safer growth stock, instead.
