Snapchat's $400 Million Deal With Perplexity AI: A Bold Bet on the Future of AI-Powered Social Media

Snap Inc. (NYSE: SNAP), the parent company of Snapchat, is making a high-stakes move to redefine its future... and investors are taking notice.

During its third-quarter earnings call last week, Snap announced a $400 million partnership with Perplexity AI, a rising player in the artificial intelligence ("AI") space.

The deal is about more than just tech. It marks a major strategic pivot for Snap as it looks to diversify beyond digital ads and reposition Snapchat as an AI-powered platform for Gen Z and younger users.

As Snap CEO Evan Spiegel told Bloomberg...

We certainly see a lot of opportunity to open up Snapchat to more AI partners over time. The conversational interface has become a lot more valuable with the advent of conversational AI.

Let's take a look at the key details behind Snap's $400 million AI deal...

Under the terms of the agreement, Perplexity AI will pay Snap $400 million over the course of a year, through a mix of cash and equity.

In exchange, Snap will integrate Perplexity's AI search engine into the core Snapchat app by early 2026. Users will be able to ask questions and get real-time answers from verified sources without leaving the app's familiar chat interface.

As Perplexity CEO Aravind Srinivas said:

Millions of people connect and discover the world through Snapchat. By bringing Perplexity to Snapchat, we're able to serve that curiosity directly where it occurs.

For Snap, it's a significant leap toward becoming an AI-enhanced social platform. For Perplexity, it's a massive distribution opportunity, gaining instant access to more than 940 million monthly active Snapchat users, 75% of whom are between the ages of 13 and 34.

Wall Street Reacts to Snap's AI Push

The Snap-Perplexity partnership announcement coincided with Snap's third-quarter earnings, and investors cheered the move.

Shares surged up to 25% in the days that followed, signaling strong investor support for Snap's evolving AI strategy and revenue diversification.

Snap reported third-quarter revenue of $1.51 billion, beating analyst expectations. It also posted a narrower-than-expected net loss of $104 million, a stark improvement from $153 million a year ago.

Daily active users rose 8% year over year to 477 million, while its subscription tier, Snapchat+, now boasts approximately 17 million paying users, folks who are paying either $3.99 a month or $29.99 a year.

To reinforce confidence, Snap also unveiled a $500 million share-repurchase program, or 4% of shares outstanding, and hinted at future partnerships with other AI startups.

Wall Street applauded the move. Deutsche Bank analyst Benjamin Black wrote:

Snap's strategic partnership with Perplexity AI represents a meaningful step toward building out alternative revenue streams, as similar to Pinterest, large advertisers in the U.S. seem to be pulling back from advertising on the platform.

But with a number of AI chatbots to choose from – including OpenAI's ChatGPT, Google's Gemini, xAI’s Grok, and Anthropic's Claude – why did Snap decide to partner with Perplexity... and why now?

Snap has long experimented with cutting-edge technology, including augmented reality ("AR") and generative AI. But unlike tech giants Meta Platforms (META), Alphabet's Google (GOOGL), or the privately held OpenAI, Snap doesn't have billions of dollars to pour into building its own large language models or AI infrastructure.

Instead, Snap is positioning itself as the distribution layer for conversational AI – a smart pivot that avoids heavy research and development costs while monetizing its massive, youthful user base.

Its first foray came with MyAI, a chatbot built using OpenAI and Google models. Now, Perplexity's answer engine will bring a more search-oriented experience to the platform.

Unlike typical chatbots, Perplexity specializes in delivering accurate, source-backed answers in natural language, akin to a conversational version of Google Search. As Spiegel explained during the third-quarter earnings call:

We won't be selling advertising against the Perplexity responses. But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business.

The move opens the door for Snap to become a kind of AI-content hub, offering a range of tools and assistants inside Snapchat, without needing to build everything itself.

But given that its user base skews young, we would be remiss not to discuss the potential downsides of this deal...

Risks of AI-Powered Social Media for Teens

While this AI integration could reshape Snap's future, it comes with some risk.

For Perplexity, the $400 million price tag is steep. The company has raised $1.5 billion to date, meaning it's committing more than 25% of its capital for this one partnership.

Snap's youthful user base is a valuable asset, but it also invites regulatory scrutiny.

The company has previously faced criticism over its MyAI chatbot and how it interacts with minors. Experts warn that AI chatbots for teens come with unique privacy and ethical concerns. As Robbie Torney, senior director of AI Programs at Common Sense Media, told The Deep View, "These systems aren't ready, and families and teens are even less prepared for the risks."

Snap acknowledged in its investor letter that upcoming child safety laws – like Australia's Social Media Minimum Age bill, taking effect in December – may reduce user engagement in the fourth quarter. It's also preparing for new age-verification requirements from Apple (AAPL) and Google.

Still, Snap remains committed to its long-term goal of reaching 1 billion monthly active users. And the Perplexity deal is just one part of its bigger vision...

Snap's Tech Blueprint: AR Glasses and AI Interfaces

The Perplexity integration may be a headline grabber, but it's only part of Snap's broader strategy. The company is quietly building toward what Spiegel believes is the real frontier of AI: augmented reality.

AR blends the real world with digital elements – think graphics, sounds, or information – overlaid onto what you see through a screen or headset.

If you witnessed the explosion in interest in Niantic's Pokémon GO a few years ago, that's AR. The game uses your phone's camera and GPS to make it look like Pokémon are appearing in real-world locations.

Companies like Apple and Meta are investing in AR glasses that could one day project maps, messages, or 3D objects right in front of your eyes as you move through the world.

And Snap wants a piece of the action. The company confirmed it's spinning off its AR glasses division, Spectacles, into a fully owned subsidiary.

The next-gen version – expected in 2026 – will integrate generative AI models from OpenAI and Google. Snap envisions a future where AI and AR merge to create wearable computing interfaces, and it wants to lead the charge. As Spiegel told Bloomberg:

I think fundamentally AR is the interface for AI. Certainly the chatbot is not the end of the road here for the way that people are going to want to engage with and use AI.

Snap has already seen success with AI-powered lenses, like its Imagine Lens image generator, which more than 500 million users engaged with in the third quarter alone.

The Big Question: Can Snap Monetize AI?

Snap still earns the vast majority of its revenue, about 90%, from advertising.

But the model is evolving...

The company reported that direct response ad revenue (ads with a call to action) rose 8% year over year, driven by features like Pixel Purchase and App Purchase optimizations.

Meanwhile, Snap's "other revenue" segment – powered by Snapchat+ and experiments like Perplexity – is growing fast. It brought in $190 million in the third quarter, up 54% over the same period a year ago.

If the Perplexity partnership succeeds, Snap may replicate the model with other AI startups, transforming itself from a social media platform into an AI-enabled digital ecosystem. As Spiegel explained on the earnings call:

Starting in early 2026, Perplexity will appear in our chat interface for Snapchatters around the world... Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community.

Snap's High-Risk, High-Reward AI Strategy

The Snapchat-Perplexity AI deal is more than a $400 million partnership. It's a clear signal that Snap wants to reinvent itself beyond a platform for selfies and Stories and into a leading AI-distribution channel.

The risks are real – regulatory hurdles, an uncertain path to monetization, and growing competition – but the potential payoff is just as big.

And looking at the company's stock, it's clear that Snap has to do something to reframe the conversation about its future.

As you can see, shares of SNAP exploded higher during the COVID era. From 2020 to 2021, Snap reported revenue growth of 64%. Losses at the net income level narrowed from negative $944 million to negative $487 million. It seemed like Snap had turned a corner.

But in the subsequent year, revenue growth slowed. Net income losses widened. The stock crashed approximately 87% from its Covid-era highs to current levels around $9. That volatile performance is why our proprietary Stansberry Score awards the stock an underwhelming C grade.

With AI search, chat, and AR all converging inside Snapchat, Snap may finally have found a strategy to compete with Silicon Valley's deep-pocketed tech titans. But until we see this new strategy show up in improved fundamentals, this is still a stock to approach with caution.

Regards,

Sam Latter