It's no secret the global economy is in rough shape right now. Inflation remains elevated and interest rates continue to rise, which has pressured consumers' spending power. As a result, businesses have slashed their marketing budgets for fear of a lesser return on their investment.
Companies in digital industries like social media rely on advertising to generate revenue, so the last 12 months haven't been easy for them. Snap (SNAP 27.63%), which is the parent company of Snapchat, has struggled more than most. Investors sent its stock price plunging almost 20% the day after it released its financial results for the second quarter of 2023 (ended June 30), and it's now down 87% from its all-time high.
Snap's advertising revenue sank once again, and it issued a weak forecast for the coming third quarter. But there were bright spots, so here's why the steep decline in Snap stock might be a great buying opportunity for the long term.
Snap is reimagining the advertising experience
Snap is still working on building its advertising technology back up after Apple made changes to its privacy rules in 2021, which made it significantly harder for social media companies to track their users' activity across the internet. As a result, Snap's ad inventory hasn't been as attractive to businesses, which has exacerbated its struggles in this tough economic environment.
It is making improvements in that area, but the company has another unique advertising technology that is delivering strong results: augmented reality (AR). Advertisers can take a photo of a product and instantly create an AR Lens in Snapchat. Then, Snap's revolutionary Try-On feature enables users to interact with the product with AR; for example, if it's an item of clothing, they can try it on virtually using their smartphone camera.
While it's still early days, many businesses have seen a substantial increase in conversions and average revenue per customer using AR ads on Snap. Plus, the company is now selling a software-as-a-service product to businesses called AR Enterprise Services, which provides all the tools they need to create, manage, and successfully deliver AR content to users, both on and off Snapchat. Importantly, this will help diversify Snap's revenue away from the volatile advertising business alone.
My AI shines, and Snapchat+ hits 4 million subscribers
Artificial intelligence (AI) is another area in which Snap is investing heavily. Earlier this year, it launched an in-app chatbot called My AI, which is powered by OpenAI's ChatGPT platform. Not only can it answer questions; it can even offer gift ideas for friends, or help users plan a holiday. So far, more than 150 million Snapchat users have engaged with the chatbot and they've collectively sent a whopping 10 billion messages.
Snap says those numbers make My AI one of the most actively used chatbots in the industry. It will become more useful over time with continuous training, which could increase the amount of time users are spending on Snapchat. In turn, that will create opportunities to generate more advertising revenue.
That brings me to Snapchat+, the company's subscription service that gives users early access to new features on the platform for $3.99 per month. Subscribers were among the first to test My AI earlier this year, and they currently have access to more than 20 different features that regular users don't. But, most importantly, Snapchat+ is yet another way the company is diversifying its revenue away from advertising.
It has acquired 4 million subscribers so far, and by my math, that would equate to $191 million in annual recurring revenue. It's a drop in the bucket considering Snap is expected to deliver $4.1 billion in total revenue this year, but the service is only one year old so there's still plenty of room for growth.
Snap's revenue shrank in Q2, but there was some good news
Snap generated $1 billion in revenue during Q2, which was a 4% drop compared to the same period last year. It gets worse, because the company issued a forecast for the third quarter that suggests revenue could fall 5% year over year. No investor wants to own shares in a shrinking business, hence the near-20% plunge in Snap's stock the day after it released those results.
But here's the good news. Snap's daily active user base hit a new all-time high of 397 million in Q2. As long as the company continues to attract fresh users, it's always going to attract advertisers. The key is for Snap to continue developing its technology to drive up efficiency for each ad dollar spent on its platform, so those advertisers spend more money.
The company has a very strong balance sheet with which to continue investing in those improvements, as it's sitting on $3.7 billion in cash, equivalents, and marketable securities. Therefore, time is on Snap's side.
Broadly speaking, Snap should also experience a boost to its advertising business as the economy improves, which will likely be in 2024. Many experts are predicting that's when the U.S. Federal Reserve will begin to cut interest rates, which should reignite businesses' marketing budgets. Wall Street analysts are already predicting Snap's revenue growth will reaccelerate to 15% in 2024, with $4.7 billion coming through the door.
With Snap's user base growing and a potentially more favorable environment ahead, buying Snap stock while it's down 87% from its all-time high might prove to be a great move in the long run.
