The technology sector is in the middle of an important earnings season for the quarter ended March 31. Investors are keeping an eye on how companies are navigating this difficult economic environment, as inflation remains elevated and interest rates continue to rise.
Companies like Snapchat parent Snap (NYSE: SNAP), which rely on advertising revenue, have struggled. Businesses cut their marketing budgets to conserve resources and because they fear a lower return from their marketing because consumer spending is more constrained.
Snap stock sank 19% after the company reported its first-quarter earnings, taking its overall decline from its all-time high to 89%. But there were some key positives in its results, so here's why investors might want to take this opportunity to buy the stock on the dip.
Snap races to improve the advertising experience
Since 2021, Snap (and competing social media companies) struggled with privacy changes made by Apple, which limited the ability of apps on Apple products to track users across the internet without their clear permission. This crippled social media platforms' ability to sell highly targeted ads to businesses, which resulted in a slowdown in revenue.
Snap made a series of internal changes to work around some of these limitations, including developing new features for advertisers to boost conversions. The company says some of the new features it's rolling out were disruptive to revenue generation in the short term but should result in much better results in the long run. Combined with the tough economic climate, Snap's revenue sank 7% year over year in Q1 to $989 million.
To further improve the advertising experience, Snap continues to work on a unique feature: augmented reality (AR). It introduced new tools allowing businesses to simply upload a photo of a product, and Snap's technology will create an AR Lens of it in seconds. If it's an item of clothing, for example, the user will then be able to try it on virtually using their smartphone camera.
Eyewear retailer Goodr has seen a 67% increase in ad conversions using AR, a 59% increase in revenue per shopper, and it found users were 81% more likely to add a product to their cart from an AR ad.
Snap introduces ChatGPT-powered artificial intelligence
Earlier in 2023, the tech world was stunned by the capabilities of OpenAI's ChatGPT online chatbot, which is powered by artificial intelligence (AI). Snap has since integrated ChatGPT into the Snapchat platform to power a new feature called My AI. It's a chatbot users can personalize, converse with, and even ask for recommendations on places to visit, and which AR Lenses to use.
Soon, users will be able to send photos and videos to My AI, and the chatbot will generate unique content in response -- it will be just like exchanging Snaps with a friend. The company thinks this will lift engagement on the platform, and it's experimenting with other areas it can introduce AI, too.
Generative AI promises to transform the economy. One estimate by Ark Investment Management suggests software like ChatGPT could create $90 trillion in enterprise value by 2030, so Snap's early adoption might yield significant results.
Here's the most important positive from Snap's Q1 results
The broader economy won't remain weak forever. Inflation is already falling at a fast pace, which means further interest rate increases might not be warranted. That will provide relief for consumers and potentially make businesses more confident about increasing their investments in marketing again.
That's why this one metric is so key for Snap: user growth. SnapChat's daily active user base reached an all-time high of 383 million people in Q1, up 15% year over year.
When the advertising market picks up again in the future, Snap will have more users than ever to monetize. The company's average revenue per user (ARPU) declined 19% in the quarter, but it was impacted by the changes it's making to its advertising platform as mentioned earlier. Plus, key competitor Meta Platforms, which owns Facebook and Instagram, also saw a small dip in ARPU. That highlights the broader industry's weakness.
Therefore, with Snap stock down 89% from its all-time high, the risk-reward proposition for investors looks very attractive, particularly over the long term.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool has a disclosure policy.