Snap Inc. recently launched its fifth generation of augmented reality (AR) spectacles, just days before rival Meta Platforms’ Connect event, where Meta will showcase its latest hardware.
Along with the new AR glasses, Snap announced a partnership with OpenAI to help developers integrate AI tools into the smart glasses.
But as exciting as these advancements sound, the question remains: Can Snap afford to compete in the capital-intensive AR market?
Can Snap afford the capital-intensive AR market?
The AR market is still in its early stages and far from being mature enough for most tech companies to confidently invest.
While Meta has bravely poured billions into developing AR technologies, many other companies have hesitated, as the return on investment is unclear.
Snap Inc. seems determined to claim a slice of this market, but the timing raises concerns. Its advertising business, which is the company’s core revenue driver, is extremely volatile and continues to struggle.
Up until Q2 2024, Snap had yet to generate an operating profit in this segment.
While Meta’s advertising business has experienced robust growth, Snap’s has lagged, raising the question: Should Snap be increasing R&D spending on a product that won’t be profitable for years?
Meta has invested over $63 billion in its hardware projects since 2020, with mixed results.
But Meta can afford it—the company generated over $39 billion in net income last year alone, making its heavy investment manageable.
Snap, on the other hand, reported a net loss of $1.3 billion last year.
With its stock price in a prolonged downtrend, Snap continues to invest in AR initiatives with no clear bottom-line benefit in sight.
Snap’s previous efforts with AR
Snap does not provide detailed financial breakdowns of its hardware segment, but its history with AR is far from encouraging.
The company’s first internet-connected spectacles, launched in 2016, resulted in $40 million worth of unsold inventory, which it had to write off.
Subsequent versions, including the 2021 AR model aimed at developers, failed to gain traction in the market.
CEO Evan Spiegel insists that focusing on camera technology is the right hardware strategy for Snap, but investors remain skeptical.
With the company’s core business underperforming, the sustainability of this hardware-centric approach is questionable at best.
What are shareholders thinking?
Earlier this month, Spiegel informed staff that Snap had recovered from its advertising slowdown and that growth would accelerate as the company shifted its focus to targeting small advertisers.
However, investor sentiment remains pessimistic.
Snap has often been labeled a “dead company walking,” and while Spiegel has used buzzwords to maintain optimism, the company’s poor financial performance quarter after quarter is apparent.
The stock is down 40% year-to-date, and Snap’s AR initiatives are no longer enough to excite investors.
Shareholders are increasingly frustrated with the company’s inability to translate potential into sustainable growth, and its continued focus on unprofitable ventures like AR only deepens those concerns.
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