What happened
Shares of social-messaging app Snap (SNAP 27.63%) were up 16.1% in June, according to data provided by S&P Global Market Intelligence. Investors are increasingly excited about developments in the field of artificial intelligence (AI), and Snap is seen as a beneficiary of the trend. Moreover, the company gave an encouraging update regarding its subscription product.
Generative AI image creation has captured the imaginations of investors. Using simple text prompts, users can have AI create images quickly and easily. On June 19, Snap announced its own contribution to the field. Through its research division, the company developed a model called SnapFusion, allowing images to be created in under two seconds, which is incredibly fast.
On June 29, Snap celebrated the one-year anniversary of Snapchat+, its subscription product that includes premium features. In just one year, the company has amassed 4 million subscribers, which is impressive growth. After all, management said it had just over 3 million subscribers at the end of April, so it almost seems as though the subscription service is picking up steam.
The market celebrated Snap's positioning in the AI space and its progress in developing recurring revenue streams. And that's why the stock did so well in June.
So what
Snap stock is down about 85% from its all-time high. There are multiple reasons for this. But one reason is the state of the advertising market. Snap generates almost all of its revenue from placing ads on its Snapchat platform. But revenue has fallen because ad rates have gone down as macroeconomic uncertainty has increased.
Against these lower expectations as a starting point, Snap stock was able to bounce back in June because investors are hopeful that Snap can diversify its revenue away from ads.
As a reminder, Snapchat+ isn't Snap's only revenue-diversification strategy right now. The company is also developing augmented reality (AR) tools for enterprises, which could serve as another income stream in the future.
Now what
When it comes to virtual reality (VR) and augmented reality, I believe Snap has some truly impressive tools. I don't wish to detract from that, but it's hard for investors to know how these tools could meaningfully improve Snap's profits, which is the weightier long-term consideration. After all, the company is still operating with steep losses when factoring in stock-based compensation expenses.
Because of ongoing losses and ongoing struggles with its largest revenue stream, Snap stock is one I'd approach with caution right now. Yes, it can benefit from growth in the AI space and the VR space. But I believe there's plenty of time to wait and assess the potential positive contributions from these technologies before buying Snap stock.
