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Snap has been on an accelerated revenue diversification path over the past few years. Branching out from its core business in ad revenue, it has launched subscription products such as Snapchat+. And with a subscription revenue run rate of $1 billion, it appears to be working.
Since we wrote about these moves in Part 1 of this series, there have been additional points of validation for Snap’s diversification trajectory, such as Wall Street favor. Following a few years of market-cap declines, public markets are more recently warming up to Snap.
One signal came about a month ago when Rothschild Redburn doubled its price target for Snap from $5 to $10. It also upgraded its stock rating from neutral to buy, which incited a mini-rally of up to 50 percent stock-price growth – the most positive movement it has seen in a while.
Since then, Snap stock has fluctuated, with Q1 earnings thrown into the mix. The end of its Perplexity deal applied downward pressure, as did this week’s pullback on tech stocks. But Snap stock hasn’t dropped to its pre-April lows as the diversification-driven long-view persists.
From Specs to Subscribers: Snap’s Revenue Diversification Moves
Diversify & De-risk
Emboldening Snap’s long-term narrative is some corporate restructuring to gain operational efficiencies. This includes eliminating 1,000 jobs – 16 percent of its workforce – and reducing costs by $500 million this year. The cherry on top is approaching a billion monthly active users.
But back to revenue diversification, a key question is what’s driving it? For one, the advertising market is being upended by several macro factors, causing ad-dependent tech players from Google to The New York Times to establish new revenue streams to de-risk their businesses.
Those macro factors include generative AI and other procedural automation, which have displaced ad agencies and replaced owned media with earned media. Among other things, AI has empowered brands to do more with less and have greater marketing impact without paid media.
These factors have caused ad rates, such as CPMs, to inflate to make up for lost margins. That in turn drives away more advertisers – a vicious cycle. Combine softened demand, higher prices, and a flood of new cost-efficient alternatives, and you have an ad world turned upside down.
Pronounced Challenge
The result of all that is today’s drive towards diversified revenue to both de-risk and maintain growth – a pronounced challenge for tech giants given the law of large numbers. It can be seen at Google, among others, given its growing share of revenue for YouTube and Google Cloud.
As for Snap, it’s been an exemplar in this broader trend, given its $1 billion ARR milestone in its subscription business. That includes Snapchat+, Lens+, creator subscriptions, and a growing list of others. And before we forget, Consumer Specs – via its Specs Inc. subsidiary – is on that list.
In fact, the subscription demand shown by Snapchat+ and Lens+ bodes well for Spectacles. Snap has been able to crack the code on getting social users to pay for things – an elusive beast in a broader sense. Could that mean Snapchat users will pay for faceworn tech en masse?
“Being able to demonstrate that our community’s willing to pay for that innovation, I think, really bodes well for the future of the platform and the future of Spectacles,” said Evan Spiegel on last week’s earnings call. “We’re really excited to have more diversified revenue.”