The Zhitong Finance App learned that Evan Spiegel, co-founder and CEO of Snapchat's parent company Snap (SNAP.US), said he is investing more to introduce artificial intelligence and machine learning into Snapchat to make users more interested in it. This is the company's next major shift after years of overhauling its advertising business.

“Everyone knows we're lagging behind in machine learning, which is partly reflected in business performance,” Spiegel said. “We need to make improvements in this area and bring together some of the most experienced machine learning people to discuss how we can get to the most advanced level and really invest in it.”

Snap has been grappling with drastic changes in how people use social media apps and what advertisers want. Over the past few years, Snap has reformed its advertising business.

Now, the company is investing money into building machine learning, artificial intelligence, and augmented reality (AR) features that benefit Snap's advertising business and user subscriptions. Snap does not rely entirely on in-house development like Alphabet or Meta Platforms. Instead, it collaborates in the cloud with large technology partners such as Amazon and Alphabet's Google, and is committed to product innovation.

However, Snap expects to continue to invest around 84 cents per user per day each quarter in infrastructure alone. According to Bloomberg's calculations, this equates to around $1.5 billion a year, which is estimated to be slightly more than half of the annual operating expenses.

Direct advertising

Snap has expanded from focusing on brand ads to direct response advertising (DR), an advertising method that encourages people to buy or download apps more quickly — which is technically more challenging, but also more profitable.

Reforms come at a cost. Snap's stock price is already down more than 70% from its high during the pandemic, but the company has delivered on Spiegel's promised improvements. Following a decline in revenue in the first two quarters of 2023, Snap's new advertising products are trending. Snap has resumed double-digit growth, and analysts expect this year's revenue to reach its highest level ever. After posting positive quarterly earnings last month, the stock is up more than 71% from a year ago.

“Snap's years of hard work are beginning to pay off for its advertising business,” Emarketer's senior analyst said after the release of the latest earnings report. “As a platform that can provide services, Snap seems to be building a certain level of credibility.”

Reforming again

As ad revenue grows again, Snap plans to expand its content products and augmented reality experiences and drive new product experiences.

Snap wants to improve its Stories and short video app Spotlight's recommendation algorithms. Snap's next big move is to bring these two products together. “I think this will help people discover our content on our services, so this is an important priority,” Spiegel said.

Spiegel sees augmented reality as promising because it can “integrate with the world and share it together.” “There are many things we are concerned about that cannot be achieved with current technology. So, whether it's virtual reality (VR) headsets, computers, or phones, I think people will really be isolated by the tech products they use today. We're looking forward to a future where people play, learn, and work together in the same shared physical environment, but this is achieved through augmented reality.”