Snap Faces Copyright Lawsuit, Adding to AI and Regulatory Overhangs

What happened

A group of YouTubers with 6.2 million collective subscribers has sued Snap for allegedly using their video content without permission to train AI models for features like the Imagine Lens. This lawsuit compounds Snap's existing regulatory risks, including FTC and DOJ scrutiny on youth safety and AI, as noted in the DeepValue report. Despite achieving 477 million DAUs and positive free cash flow, Snap remains structurally unprofitable with negative GAAP earnings and trades at over 3x a conservative DCF estimate of $1.80 per share. The legal dispute could escalate litigation costs, lead to fines, or constrain AI development, which is critical for Snap's AR and ad monetization strategy amid intense competition. Overall, this adds another layer of uncertainty to an already risky investment case with limited margin of safety.

Implication

Investors should expect rising legal expenses and potential settlements that could dent Snap's positive free cash flow and delay profitability. Regulatory pressures may intensify, leading to stricter compliance or product restrictions on AI features, undermining key growth initiatives. This aligns with the DeepValue report's concerns about Snap's vulnerability to external shocks and competitive pressures from larger peers like Meta and TikTok. Given the stock's overvaluation relative to intrinsic value, the added risk justifies a cautious or bearish stance. Monitoring the lawsuit's outcome and broader AI data usage trends is essential for assessing Snap's long-term viability.

Thesis delta

The news reinforces the DeepValue report's POTENTIAL SELL bias by introducing new legal risks to Snap's AI strategy. It highlights how regulatory and legal challenges could stall innovation and increase costs, further pressuring margins and growth prospects. No fundamental shift, but it strengthens the case for trimming or exiting positions due to heightened uncertainty.