Snap Inc. (NYSE:SNAP) is up almost 35% year-to-date as investors see the social media company as another generative AI beneficiary. This year, Snap unveiled a host of AI-focused updates, including “AI Snaps” and “My AI”, as it continues to play a catch-up game in the race with the likes of Meta Platforms.
Snap stock has recorded solid YTD gains despite a setback it experienced in late April after reporting first-quarter results that missed the average analyst estimate. The Q1 underperformance has been blamed on continued investments to make its social media platform more up-to-date, all this while operating in a tough macro environment.
How Did Snap Perform In Q1
The company said its revenue fell 7% year-over-year to $988.6 million, missing the analyst target of $1.01 billion. The underperformance was fueled by a 16% drop in North American sales, which missed the consensus by roughly $40 million.
According to Tim Fries of financial media outlet The Tokenist,
“The [Q1] report pushed Snap’s stock to its lowest mark since April 2020 and wiped out a combined $80 billion from social media stocks.”
Snap also reported an adjusted profit per share of 1c, better than the expected loss of 5c. The number of daily active users rose 15% to 383 million, led by an 11% surge in the number of Europe-based users. The average revenue per user (ARPU) also disappointed, coming in at $2.58 and below the expected $2.62.
Higher costs, which are needed so Snap can compete with its rivals, are hurting the company’s performance. In addition, Snap has continued to suffer from ad transition challenges given a tough macro environment.
These challenges were also reflected in the company’s “internal” guidance, which was shared on the earnings call. Snap has the tendency not to provide formal guidance for revenue or adjusted EBITDA.
The company is projecting Q2 revenue between $1 billion and $1.09 billion, implying a YoY decline of 6% and quarter-over-quarter growth of 5%. The adjusted EBITDA is seen between negative $100 million and negative $50 million. DAUs are expected in the range of 394-395 million.
Shares fell as much as 17% in response to Snap’s Q1 performance. Still, the stock has managed to recover all losses in a matter of weeks as investors continue to bet on Snap being one of the biggest social media beneficiaries of the ongoing generative AI adoption.
High Expectations From My AI
Back in February, Snap introduced “My AI,” a chatbot that is based on OpenAI’s ChatGPT technology.” In the blog post announcing the new product, Snap also dedicated some space to warn users again My Ai has “many deficiencies.” Still, the company wanted the rollout to take place as early as possible, bearing in mind the AI arms race that is taking place across the globe.
“My AI can recommend birthday gift ideas for your BFF, plan a hiking trip for a long weekend, suggest a recipe for dinner, or even write a haiku about cheese for your cheddar-obsessed pal. Make My AI your own by giving it a name and customizing the wallpaper for your Chat,” it is said in the PR.
In the April update, Snap said that more than 2 million chat messengers are exchanged every day with My AI, with the most frequent topics including movies, sports, and pets. The company also used the opportunity to unveil a set of new features, including the option to personalize My AI, use the chatbot in the group chat, as well as ask the My AI to recommend places.
While Snap said that 99.5% percent of My AI responses conform to their community guidelines, the product was still criticized by the public, mostly by parents who have serious concerns with privacy issues.
“I don’t think I’m prepared to know how to teach my kid how to emotionally separate humans and machines when they essentially look the same from her point of view. I just think there is a really clear line [Snapchat] is crossing,” Lyndsi Lee, a mother from East Prairie, Missouri, told CNN.
This backlash resulted in bad reviews for the Snapchat app on the App Store, pushing the rating of the app down to 4.7 (out of 5) and to 4.3 on Google’s Play Store.
Meanwhile, Snap continues to insist that My AI “is far from perfect,” while adding in the April update that it has implemented a series of improvements, including the new age signal and new moderation technology.
The backlash obviously hasn’t stopped Snap users from using the new tool with Snap saying last month that over 150 million people have sent over 10 billion messages to My AI, making the product “among the largest consumer chatbots available today.”
While Snapchat+ subscribers are able to chat with the My AI bot for months now, the company also introduced “My AI Snaps,” which generate automatic Snaps. Additionally, the company also unveiled “SnapFusion,” which shortens the model runtime from text input to image generation on mobile to under two seconds.
In addition to sharing some internal data with the public, Snap also said that it has continued early testing of sponsor links, which has likely reasoned well with the investing community as the social media company prepares to present its Q2 results later this month.
Summary
Snap stock has been gaining in recent weeks and months as the social media business continues to unveil new AI-focused features. Despite facing backlash from parents over privacy issues, Snap’s My AI chatbot has gained significant traction among Snapchat+ users with more than 150 million people using the tool since the February rollout.
Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.
