MW Snap's increased AI spending may push profits even further out

By Therese Poletti

Guggenheim downgraded Snap's stock, warning that increased AI investments could defer operating profits until 2027

Snap Inc.'s plans to become more competitive in the social-media industry will come at a cost - and defer operating profits until 2027, according to a Guggenheim Securities analyst.

Like many of its peers, Snapchat's parent company plans to increase its infrastructure spending, something it detailed while reporting its fourth-quarter earnings last week. Snap (SNAP) also plans to increase its head count by 8% to 10% over the year.

Snap Financial Chief Derek Andersen told analysts on the company's call last week that its infrastructure spending will increase this year, working "toward even larger models and near real-time [AI] model refreshes."

Guggenheim's Michael Morris noted that "the likely need to invest more to be competitive drives further pressure on profitability" for Snap, which has struggled to achieve GAAP operating profits. Morris pushed out his forecast for GAAP operating profitability to 2027 from 2026.

Morris also downgraded Snap's stock to neutral from buy, and lowered his 12-month price target on the stock to $11 from $13. He estimates that Snap will spend $1.59 billion in 2025, up from $1.44 billion in 2024.

While not detailing overall capital-spending costs, Snap discloses its investment in its infrastructure by calculating the cost per daily active user. In its call with analysts, Snap said it would be spending about 82 cents to 87 cents per DAU, or a range of $371 million to $394 million, per quarter, but that spending will be lowest in the first quarter. The company reported 453 million daily active users in the fourth quarter.

"While we don't necessarily believe that additional investment is the wrong strategy, we also note that the company's relatively slower revenue growth has come despite similar management intent to drive acceleration during prior periods," Morris said in a note to clients.

Morris noted that Snap's 10% global advertising-revenue growth in the fourth quarter was below the ad-revenue growth rates of most of its peers. He noted that ad-revenue growth for Alphabet Inc. $(GOOG)$ $(GOOGL)$ was 11%; while it was 18% for Amazon.com Inc. $(AMZN)$; 21% for Meta Platforms Inc. $(META)$ and 18% for Pinterest Inc. $(PINS)$.

In Snap's investor letter for the quarter, it said its adjusted cost of revenue for the quarter was $669 million, up 9% year-over-year, with infrastructure costs as the largest driver of that increase.

Guggenheim's Morris also lowered his adjusted earnings estimates to 37 cents a share for 2025, down from 38 cents per share. For 2026, he cut his estimates to 52 cents from 59 cents previously.

Snap's shares were down fractionally in early Tuesday trading.

-Therese Poletti

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February 11, 2025 10:31 ET (15:31 GMT)

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