Video-centric social media company Snap Inc. (SNAP, Financial) has taken a painful pummelling as the broader basket of social media and tech stocks sold off last year. It's hard to believe that shares of Snap are now down around 88% from their euphoric highs of 2021. It seems doubtful that Snap can snap back to such levels any time soon, with interest rates likely to creep higher from here even despite the failure of SVB Financial's (SIVB, Financial) Silicon Valley Bank.
Still, I believe Snap stock may have fallen too hard, too fast. And in such scenarios, a partial snapback may be warranted. What could help Snap find its footing again? I think it could be artificial intelligence (AI).
With the AI hype picking up traction, thanks in part to Microsoft (MSFT, Financial) and Alphabet (GOOG, Financial)(GOOGL, Financial) with their AI chatbots, even tech companies like Snap that you usually wouldn't associate with AI are looking to get in on the race. And why not? There's a lot to win from the AI race. For some companies, it may be the answer to climbing out of the gutter that 2022 kicked them into.
Snap is getting in on the AI race; why the market may be overlooking the move
Snap's more recent innovations have been bet met with mixed results. Snap's augmented reality (AR) glasses, the Spectacles, aren't exactly a profitability driver. Though Snap's AR software is impressive, it's unclear as to when such "fun and funny" video filters will translate into a fatter bottom line. Further, it seems like almost everybody has their own set of filters to play the rise of AR and, eventually, virtual reality (VR) and the Metaverse.
In any case, I think strong AI capabilities could be more lucrative than AR, at least over the near- to medium-term. The AI hype has spread from Microsoft, OpenAI and Alphabet to many other companies. If "blockchain" was the buzzword of 2020, then AI is undoubtedly the one for 2023. Unlike blockchain, AI could help enrich or even change the game for a large number of companies inside and outside of the world of tech.
Snap recently announced the launch of an all-new AI chatbot named "My AI," which is expected to be included alongside the Snapchat+ subscription. Indeed, Snapchat+ went from being a niche service for its biggest fans to something that could change the game.
'My AI' could help Snap recover
For now, everyone has free access to OpenAI's ChatGPT and Bing AI through Microsoft's Bing app. However, other companies will need to more directly monetize their offerings, as they don't have Microsoft's same ad revenue or a search engine that could gain market share. I also think even Microsoft could make AI more profitable, whether we're talking about ads included in Bing AI or a premium subscription for future iterations of ChatGPT.
While ChatGPT even Bard may end up taking the lion's share of the chatbot market, there's still a lot of runway for smaller players like Snap to get into AI. Given Snap's relatively small size ($19.8 billion market cap), a sliver of the AI market could be a big deal. Further, a chatbot may be the innovation that draws in social media users from other platforms. At this juncture, it's hard to tell just how much of a difference Snap's chatbot will make. In any case, I believe far too many investors overlook the company's ability to build a contender in the generative AI wars.
With the stock in the gutter and the valuation at a modest level, I'd argue the risks are justifiable, given the shots at an outsized reward potential. As of this writing, shares of Snap trade at a price-sales ratio of just 4.1. That's not much to pay for a solid, albeit challenged, platform embracing tech trends like AI and AR with open arms.
Other potential catalysts beyond AI
It's not just AI where Snap can innovate. Augmented reality (AR) and mixed reality (MR) could tilt the tables in favor of the video-based social platform and away from text-based platforms like Twitter. Indeed, it's tough to tell when AR and the Metaverse will be ready to take off. Regardless, Snap seems quite ready with the longstanding popularity of its filters.
In addition, rumors of a TikTok ban could help propel Snap. TikTok is the social media platform that a lot of rivals have tried to emulate of late. If it is banned in the U.S., I believe Snap is one of the contenders that could pick up the many TikTok users, though unfortunely as of now, its AI is not up to the task of being a true TikTok competitor.
Final thoughts
Snap doesn't provide a very clear picture of how it plans to become profitable. Regardless, it's hard at work on many innovations that could help it spark growth in the future. For now, I view AI as a key area for growth. Snap CEO Evan Spiegel has not shied away from innovation, and I don't think he will, even as Snap's share price continues to take a beating at the hands of its many headwinds.
