Snap's Q3 performance exceeds expectations, with monthly active users approaching 1 billion. Perplexity invests $400 million to create "AI conversation as search".

Snap Inc., the company behind the popular "disappearing message" app Snapchat, announced a partnership with AI search leader Perplexity AI Inc. valued at up to $4 billion. This collaboration will integrate Perplexity's AI-driven intelligent search engine into Snapchat. Following the announcement of better-than-expected performance reports, Snap's stock price surged over 25% in after-hours trading on the US stock market. This latest deal is seen as bringing a new growth opportunity to Snap, which has been facing a slowdown in performance growth. It also positions the social media company more firmly in the competitive landscape surrounding AI chatbots and private AI assistants. According to Snap CEO Evan Spiegel, Perplexity's "AI Answer Search Engine" will be integrated into Snapchat's chat interface starting in 2026, while the company's existing My AI technology will still be available to Snapchat users. "We clearly see that as conversational AI ecosystems emerge, all online conversation interfaces, including Snapchat, become more valuable. In the future, there will be ample opportunities for Snapchat to open up to more AI partners," Spiegel told analysts at an earnings conference. Perplexity AI is expected to receive a substantial amount of cash and stock payments from Snap as part of the partnership. Snap stated in a release that the revenue generated from this collaboration is expected to make a significant contribution to performance starting from next year. Perplexity currently has over 20 million active users, but the AI leader has also faced lawsuits from several tech companies, including Amazon.com, Inc. and Reddit Inc., for alleged violations of service terms. The announcement of this major collaboration came alongside Snap's release of its third-quarter performance report, which exceeded Wall Street analysts' expectations. By the closing of regular trading on Wednesday, Snap's stock price had dropped over 32% year-to-date, with a current market value of only around $12.3 billion. However, due to the strong performance and the significant partnership with Perplexity, Snap's stock price surged more than 25% in after-hours trading. The financial data revealed that for the fiscal quarter ending on September 30th, Snap reported total revenue of approximately $15.1 billion, representing a year-on-year increase of about 10%, slightly higher than the average Wall Street analyst expectation of around $14.9 billion. Management also provided holiday season sales outlook data that aligned with Wall Street analyst expectations. Snap expects fourth-quarter revenue in the range of $16.8 billion to $17.1 billion, with analysts expecting around $16.9 billion. Snapchat's active user growth slightly exceeded Wall Street analyst expectations. The photo and video messaging app saw a daily active user count of 477 million in the third quarter, an 8% year-on-year increase. The company also reported a monthly active user count of approximately 943 million, inching closer to Snap's ambitious goal of reaching 1 billion users. Despite facing significant obstacles in its advertising business, which drives about 90% of revenue, including challenges from global trade policies and technical issues related to automation tools, Snap saw a major turnaround in the third quarter. Advertising-related revenue reached $13.2 billion, a year-on-year increase of about 5%. "In addition to our large client business in the North American market, our advertising business continues to show strong growth," the company stated in a letter to shareholders. Snap's management plans to make "targeted adjustments" to improve performance and reignite growth expectations among large advertisers. In recent years, Snap has been making comprehensive adjustments to its business, aiming to cultivate a larger base of small and medium-sized advertisers. It has introduced new advertising formats like Sponsored Snaps and Promoted Places and invested more in high-margin "direct response ads" that offer precise targeting and clear calls to action. The company noted that small and medium-sized businesses drove the growth in its advertising revenue in the third quarter, with a surprise 8% year-on-year increase in direct response ad revenue. Snap CEO Spiegel sees significant opportunities in helping advertisers interact more deeply with users through chatbots and private AI assistants. He mentioned that advertisers with their own AI assistants are interested in incorporating them into Snapchat. "I think the interesting longer-term play will be connecting Sponsored Snaps with these AI intelligent agents to provide more personalized services to our advertising partners, which is what we're working on building," he said at the earnings conference. Snap's monthly subscription product Snapchat+ has helped the company reduce its dependency on advertising, which is more seasonal and volatile in terms of revenue. The paid subscription user base for Snapchat+ is close to 17 million, up from nearly 16 million in the previous quarter. These subscriptions are the main driver of Snap's "other revenue" category, which saw a significant 54% year-on-year increase in revenue in the third quarter. However, the California-based social media company warned shareholders that recent actions to remove underage users from the platform in compliance with various age verification and child safety laws could negatively impact user engagement in the near term. For example, Australia's "Social Media Minimum Age Legislation" taking effect in December will restrict social media usage for those under 16. "While we remain committed to our goal of serving a global community of up to 1 billion monthly active users, we anticipate that, due to these internal and external factors, overall daily active users may decline in the fourth quarter," Snap wrote in its letter to shareholders.