Snap Stock Jumps 9% on Perplexity Partnership

Shares of Snap Inc. (SNAP) surged 9% on Thursday following the announcement of a $400 million collaboration with Perplexity AI and the release of its third-quarter financial results. The market reacted positively to the strategic move, signaling investor optimism.

The crux of the deal lies in the integration of Perplexity AI’s search engine, known for its ability to synthesize information from multiple sources and present it in a conversational format, directly within the Snapchat application. This integration aims to enhance the user experience by offering more comprehensive and real-time information discovery capabilities, venturing beyond Snapchat’s traditional social features.

According to Snap’s investor letter, Perplexity AI will pay the social media company $400 million over the next year through a combination of cash and equity. This financial infusion provides Snap with a significant capital boost, which the company can leverage for further investments in research and development or strategic acquisitions.

Snap anticipates that revenue generation from this collaboration will commence in 2026. This timeline aligns with the typical integration and rollout phases associated with complex technological partnerships, ensuring adequate time for seamless implementation and market adoption.

Deutsche Bank analyst Benjamin Black noted in a Thursday research note, “Snap’s strategic partnership with Perplexity AI represents a meaningful step toward building out alternative revenue streams. This is especially pertinent as, similar to Pinterest, some large advertisers in the US appear to be pulling back from aggressive ad spending on the platform.” This analysis underscores the importance of diversification in revenue models for social media companies in an increasingly dynamic advertising landscape. The strategic shift can lead to more stable financial forecast.

While Snapchat users will retain access to the existing My AI chatbot, integrating Perplexity enhances the platform’s utility by providing real-time, verified information and expanding users’ ability to explore diverse topics within the application. Perplexity is known for its rigorous source citation, a feature Snap hopes will improve user trust in provided information. This is vital with increased challenges of user-generated content and misinformation online.

Snap CEO Evan Spiegel highlighted in the company’s earnings call that the Perplexity AI integration “will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business.” He emphasized the mutually beneficial nature of the partnership, where Snap provides a massive user base and Perplexity gains greater reach for its subscription service.

Snap’s third-quarter results demonstrated solid performance, with revenue reaching $1.51 billion, exceeding LSEG estimates of $1.49 billion. Although the company reported a loss of 6 cents per share, the revenue beat and the Perplexity AI deal fueled positive investor sentiment. It’s important to recognize external factors also played a role.

The Snapchat parent also authorized a $500 million stock repurchase program, underscoring the company’s robust balance sheet and management’s confidence in its future prospects. Such programs can boost shareholder value by reducing the number of outstanding shares.

The platform’s daily active users (DAUs) increased by 8% year-over-year, reaching 477 million, surpassing StreetAccount’s projection of 476 million. This sustained user growth underscores the platform’s continued relevance and engagement among its target demographic.

However, Snap cautioned that DAUs may experience a decline in the fourth quarter due to the ongoing implementation of age verification and age limit protocols. While focusing on compliance, engagement challenges are expected to be short term.

Increased regulatory scrutiny, exemplified by Australia’s social media minimum age bill effective in December, is also poised to contribute to reduced engagement metrics. Snap’s leadership are working to meet all regulatory compliance needs per quarter.

Stateside, Utah and California have enacted online child safety legislation mandating age verification for social media platforms and enhanced safeguards for underage users. Similar legislative trends are being observed at an international scale, reflecting a concerted effort to protect children online.

“These actions are an important step in maintaining a safe and compliant platform, though we expect they will also adversely affect engagement metrics as implementation progresses,” Spiegel stated, acknowledging the near-term challenges associated with regulatory compliance.

Snap is advancing its hardware ambitions with the projected 2026 launch of its sixth-generation augmented reality glasses, Specs. The new iteration of Specs will enable developers to integrate OpenAI and Google’s Gemini AI models into the glasses’ software, unlocking new possibilities for augmented reality experiences. This integration demonstrates Snap’s commitment to staying at the forefront of the AR landscape by leveraging cutting-edge AI technology.

“We’ve got a really exciting year ahead here as we prepare for the public release of Specs,” Spiegel remarked, emphasizing the significance of the upcoming product launch. “And we’ve been thinking a lot about ways to accelerate our technical leadership in the space.” Snap’s bet is that AR through wearables is the key to next generation social.

Spiegel indicated that the company is contemplating creating a dedicated subsidiary to house Specs, fostering “opportunities to partner” in anticipation of the product’s public debut. This strategic move could facilitate collaborative ventures and partnerships within the augmented reality ecosystem.

The company introduced the Imagine Lens, an open-prompt image generation Lens, in October, reporting that over 500 million users engaged with generative-AI-powered lenses during the third quarter. This high level of engagement underscores the popularity and potential of generative AI applications within the Snapchat platform.

Goldman Sachs analysts wrote on Thursday that “Over the long term, we see SNAP as building toward its multi-year strategic vision for where consumer engagement is shifting (AR/special computing) and shifting its platform/product evolution (including Specs hardware) to meet this vision.” This is largely the message and mission Snap is trying to send to the markets.