Companies across America are racing to integrate artificial intelligence (AI) into their businesses on the promise of improved productivity and the chance to transform customer experiences. How hyped up is the interest in AI? An analysis by The Washington Post found that more than 1,000 companies mentioned AI in their earnings conference calls for the quarter ended June 30.
Snap (SNAP 27.63%), which is the parent company of popular social media platform Snapchat, has rolled out several unique AI features this year, including one it just announced on Aug. 29. It's called "Dreams," and it's powered by generative AI, which empowers users to create digital renderings of themselves in different fantasy settings.
Investors sent Snap stock price higher by almost 5% immediately following the announcement. However, it's still trading 87% below its all-time high amid a very tough environment for the advertising industry as a whole. Here's why that's an opportunity to buy it now.
Image source: Getty Images.
Snap is fighting to lead the social media AI race
Artificial intelligence is nothing new to the social media industry, but most leading platforms use it behind the scenes as opposed to deploying it to their users. ByteDance's short-form video app, TikTok, is a pioneer of the AI-powered recommendation engine. It learns what type of content each user enjoys watching, and it uses that information to feed them more of it to increase the amount of time they spend on the platform.
Meta Platforms (META 0.43%) has caught onto that trend over the last couple of years, developing similar tools for its Facebook and Instagram platforms. But the company is also handing AI tools to advertisers, who can use it to create ads and predict how well they will perform.
Snapchat, on the other hand, has opted to deliver AI features directly to its users to enhance their experience. In February, it launched My AI, which is a chatbot running on OpenAI's ChatGPT technology. It's designed to serve as a virtual assistant; it can provide users with gift ideas for friends, suggest what they should make for dinner, and it can even write poems and other content upon request.
The ability to create content is a hallmark of generative AI, though it was initially limited to text-based responses. But now, the technology can reliably produce images in many different forms. As a result, on Aug. 29, Snap expanded its AI feature set with the introduction of Dreams. Users can take a series of selfies, and then Dreams will use those images to create digital renderings with different fantasy-themed backgrounds.
Dreams builds upon the success of SnapChat's Lenses feature, which uses augmented reality (AR) to add digital enhancements to users through their smartphone camera. Generative AI is far more powerful because it doesn't just enhance a user's appearance, but rather entirely recreates it -- often with more flattering features.
Snap's business needs a spark
Despite Snap's innovative new AI features, the company has struggled with monetization over the last 12 months. Elevated inflation and rising interest rates caused consumers to tighten their belts, which meant businesses spent less money marketing products to them. Snap generates almost all of its revenue by selling ads on its platform, so that's really bad news.
In the recent 2023 second quarter (ended June 30), the company saw a 4% decline in its revenue on a year-over-year basis. That's not what investors want to see, especially when competitors like Meta Platforms experienced a growth acceleration in the same quarter.
To Snap's credit, it continues to bring new innovations to its ad platform. For example, a business can take a regular photo of a product, and Snap will generate an AR-based version that users can "try on" using their smartphone camera. It allows potential customers to engage with a product before buying it, and it's driving an uptick in conversions for businesses opting to invest in such ads.
The company is also expanding its AR-based advertising tools to businesses outside of the Snapchat ecosystem. It has created a platform called AR Enterprise Services, which customers can use to create ads for other channels.
Plus, Snap is creating new revenue streams to make its business more resilient. It now has 4 million subscribers to its Snapchat+ service, which gives users early access to dozens of pre-release features for just $3.99 per month. Additionally, Snap intends to monetize Dreams immediately; users are only entitled to eight image renderings for free, and they'll need to pay to unlock more.
There's also a possibility the technology behind Dreams will factor into the advertising picture. Given its success with AR-based ads so far, it seems logical Snap will graduate to provide generative AI tools, especially since it's working out for Meta.
Why Snap stock is a buy now
Not only is Snap's revenue shrinking, but its quarterly net losses have also steepened in 2023. It reverses the strong progress the company made toward profitability a couple of years ago, in 2021. It's a function of a decline in its average revenue per user, which fell 16% year over year in Q2 alone on the back of the drop in spending from advertisers.
None of that is good news. But there has been one consistent bright spot in Snap's quarterly results. In Q2, it had an all-time high of 397 million daily active users, which was a 14% increase from the year-ago period. As long as users continue flocking to Snapchat, it will remain an attractive platform for advertisers when economic conditions eventually improve -- and they will.
In a scenario where Snap recovers the recent dip in its revenue per user, it could experience a strong acceleration in overall revenue growth because it now has more users to monetize. That positive shift might be right around the corner. Wall Street is already forecasting a 13.9% increase in Snap's annual revenue in 2024, which would take it to $5.1 billion.
Considering Snap stock is down 87% from its all-time high, the risk-reward proposition is quite attractive at the moment. Investors willing to hold the stock for the next five years (or longer) could be handsomely rewarded for their patience.
