The social media industry is currently having one of its busiest years in recent memory. ByteDance's TikTok is still leading the short-form video space, though Meta Platforms' Instagram is quickly catching up. Plus, investors are watching Twitter struggle under its new owner, Elon Musk, while Meta's Mark Zuckerberg just swooped in with a competing platform called Threads.
Meanwhile, Snapchat parent Snap Inc (SNAP 27.63%) has been working on several innovations of its own. The economic climate has been difficult to navigate over the last 12 months, and businesses have reduced their advertising budgets, directly impacting social media platforms reliant on ads to generate revenue.
Not only is Snap working on new tools to entice those advertisers, but it's also having success with its direct-to-consumer subscription product Snapchat+. It just celebrated its first anniversary and marked the occasion by crossing a very positive milestone.
Snap stock is having a great year so far, with a 47% gain, though it's still down 84% from its all-time high. Here's why that spells an opportunity for investors.
Image source: Getty Images.
Snapchat+ hits 4 million subscribers
Snapchat is a feature-rich platform. It relies on users taking photos and videos, and using the app's extensive range of filters and editing tools to create engaging content. It has taken smartphone camera technology perhaps further than any other social media company, even using it to develop advanced augmented reality (AR) features that users love.
Keeping its 383 million daily active users continually engaged requires a constant investment in growing that feature set, and what better audience to test new ideas on than the most passionate of those users? In June 2022, Snapchat+ was born, and it officially crossed 4 million subscribers around its first anniversary.
Those subscribers pay $3.99 per month for exclusive access to the latest Snapchat features before they're rolled out on the public platform. For example, Snapchat+ users were the first to test My AI, an artificial intelligence (AI)-powered chatbot that runs on OpenAI's advanced ChatGPT technology. Today, Snap says subscribers have access to 20 new features, with more on the way.
4 million subscribers paying $3.99 per month equates to about $16 million in annual recurring revenue, which isn't much considering Snap is expected to generate $4.5 billion in total revenue this year. But Snapchat+ is still in its infancy, and it only has 1% penetration with respect to the platform's daily active user base, so there's significant upside potential.
Augmented reality is the future of advertising on Snapchat
It has been a tough couple of years for the advertising business overall, but Snap is using this time to improve the ad experience for businesses, and AR is a major part of that strategy. By taking a simple photo of a product, a business can automatically generate an AR Lens that it can deploy in its ads, allowing users to "try it on" virtually using their camera. Over the last 12 months, these initiatives have already proven to increase conversion rates and revenue per customer for businesses.
But now Snap is launching a brand new platform called AR Enterprise Services, which will operate under a software as a service (SaaS) revenue model. Basically, Snap is lending its revolutionary AR technology to businesses so customers can use it in their own online channels outside of the advertising space. It will deliver three main tools: AR asset creation, AR asset management (including performance analytics), and Snap's unique AR technology for fit and sizing products (popular for apparel).
In the first quarter of 2023 (ended March 31), eyewear retailer Goodr found users were 81% more likely to add a product to their cart after using AR to try it on. It also saw a 67% uplift in conversions and a 59% jump in revenue per customer. Additionally, Snap says businesses using its AR-powered "Fit Finder" technology to help users find the perfect size for apparel products saw a large reduction in the number of items being returned, which is a big cost saver.
Since AR Enterprise Services is a SaaS platform, it will deliver yet another recurring revenue stream much like Snapchat+. It broadens Snap's addressable market, and further diversifies the business away from advertising alone, making it less vulnerable to economic downturns in the future.
Why Snap stock is a buy as it's down 84% from its all-time high
Investors typically don't want to own shares in a shrinking business. If Wall Street is right about Snap generating $4.5 billion in revenue during 2023, that would mark a 2% decline compared to 2022. In Q1, Snap's average revenue per user (ARPU) crashed by 19% year over year, which is a major reason for the sluggish revenue expectations. But I think that's a short-term phenomenon.
See, the Snap community is still growing nicely. Its 383 million daily active users is 15% more than were on the platform in Q1 last year, so there clearly isn't an issue attracting fresh faces. When the broader economy improves and businesses start spending more money on advertising, Snap's ARPU should return to growth -- and since it has more users to monetize than ever before, that should lead to a significant rebound in its overall revenue.
In fact, Wall Street is already predicting a 15% increase in revenue during 2024, to $5.2 billion.
But investors should be focusing on the much longer term, because initiatives like Snapchat+ and AR Enterprise Services have the potential to deliver a stable flow of annual recurring revenue, which could smooth out the volatility in the advertising business, not to mention drive growth on the whole.
The steep 84% decline from its all-time high means Snap stock presents an attractive risk-reward proposition here ahead of those factors. Therefore, investors who buy in at today's reduced share price and hold for the next five years could reap substantial rewards if the company's new direction pays off.
