Snap's $400M Perplexity Deal Advances Non-Ad Revenue but Leaves Core Risks Unaddressed

What happened

Snap Inc. has secured a $400M AI partnership with Perplexity, aiming to boost non-advertising revenues and target over $1.3B in such streams by early 2026. This initiative aligns with the DeepValue report's emphasis on scaling 'Other' revenue, where Snap has shown improving execution in direct-response ads and subscription growth. However, the report underscores that profitability remains fragile due to operating losses and rising infrastructure costs from AI workloads, which this deal could exacerbate. Competitive intensity from larger peers like Meta and YouTube, along with heavy reliance on platform partners Google, Apple, and Amazon, continues to cap near-term upside. While the stock's valuation at 2x forward sales appears deeply discounted, sustained margin expansion and North America ARPU stabilization are still critical for a meaningful rerating.

Implication

The $400M deal provides a tangible step towards reducing ad dependency, potentially accelerating the $1.3B non-ad revenue target and improving the revenue mix. However, it introduces additional AI-related infrastructure costs that could pressure already fragile margins, as highlighted in the report. Snap's platform dependencies and intense competition from larger rivals remain unchanged, limiting upside potential. Investors should watch for consistent double-digit growth in 'Other' revenue and cost efficiencies to validate this move. Without clear progress on profitability and North America usage stabilization, the stock's discount may persist.

Thesis delta

The partnership with Perplexity addresses a key watch item from the report by advancing non-ad revenue growth, which could support a more constructive view if scaled successfully. However, it does not resolve the core issues of profitability fragility, competitive intensity, or platform dependencies that underpin the neutral stance. Thus, while it represents incremental progress, the overall thesis remains unchanged pending clearer evidence of durable margin expansion and ARPU stabilization.