Snap's AI push makes for a poor man's Meta

FE Team | Published: May 21, 2024 23:49:09

NEW YORK, May 21 (Reuters Breakingviews): Snap Chief Executive Evan Spiegel is sounding more like Mark Zuckerberg. He's chased the same advertisers courted by the Meta Platforms boss, while also spending big on artificial intelligence. Meta stole Snap's thunder in computerized glasses and by aping its core disappearing-messages product. The problem is, Spiegel can't match Zuckerberg's deep pockets.
Spiegel said in an interview, opens new tab with Bloomberg on Sunday that the $26 billion social-media company fell "behind the curve" on machine learning. That's understandable: the co-founder had his hands full fixing Snap's advertising woes, exacerbated by privacy policies from iPhone purveyor Apple. In response, Snap has courted small and medium-sized businesses - a group that Meta's Facebook and Instagram target, too. It's off to a promising start: in the three months ending March, Snap's revenue rose 21 per cent year-over-year to $1.2 billion, its best growth rate since early 2022.
It's spending heavily to get there. Snap's AI efforts, key to its new sales pitch, show up partly as increased infrastructure spending. In 2023's first quarter, Snap spent roughly 59 cents per daily active user on infrastructure. This year, it expects to spend up to 85 cents each quarter. Given analysts anticipate 442 million global Snap members in 2024, according to LSEG, the company is on track to spend $1.5 billion.
Throw in expected research and development costs of $1.3 billion, and it adds up to more than half of what Wall Street believes Snap will generate in revenue.
If that feels familiar, it's because tech giants like Meta are promising their own AI spending sprees. Meta's cost of revenue, which houses infrastructure costs, is expected to equal 19 per cent of its top line in 2024. But Zuckerberg also plans up to $40 billion in capital expenditures this year, roughly a quarter of revenue. Yet Meta's free cash flow nearly doubled year-over-year to $12.5 billion in the first quarter, multiples higher than Snap's $38 million.
Meta's fire hose of spending has helped it stay ahead. On the heels of Snapchat's success, Instagram developed, opens new tab its own disappearing "Stories" feature. And after Snap in 2016 launched its ill-fated Spectacles, a set of camera-toting sunglasses, Zuckerberg has since touted his company's partnership with Ray-Ban to produce its own "smart glasses."
Snap's own copycat streak has borne some fruit: shares surged 69 per cent over the past year. But Spiegel is running behind Zuckerberg's AI hype. And unlike Meta, Snap does not have the spending muscle to stay on the technological cutting-edge. Spiegel is following his arch-rival's lead, but it looks a poor man's version.
Snap Chief Executive Evan Spiegel plans to invest more aggressively in artificial intelligence, according to an interview with Bloomberg published on May 19.
The parent of disappearing-messages app Snapchat said on April 25 it expects quarterly infrastructure costs per daily active user to be in the range of 83 cents to 85 cents per quarter for the remainder of the year. That amounts to about $1.5 billion based on the 442 million users analysts estimate the company will have in 2024, according to LSEG.