Snap unveils latest AR glasses despite ongoing struggles in core ad business

Snap on Tuesday announced the fifth generation of its Spectacles augmented reality glasses that can overlay digital graphics onto the physical world.

The latest Spectacles are only available for developers, who must commit to paying $99 a month for one full year if they want to build AR apps for the device. The glasses can produce more compelling digital visuals than the prior version and are built on top of a redesigned software operating system dubbed Snap OS.

Additionally, Snap is partnering with ChatGPT creator OpenAI to give developers tools that will allow them to build and port their artificial intelligence features for the smart glasses.

Snap’s announcement comes days before rival Meta’s Connect event, a conference where Facebook’s parent typically unveils its latest hardware. Like Meta, Snap has been trying for years to break into consumer hardware. Unlike Meta, Snap’s core online advertising business has been struggling.

Snap shares fell more than 20% after the company reported its latest quarterly results in August. Investors balked at weaker-than-expected guidance for the third quarter, and the company’s revenue for the second quarter trailed analysts’ expectations.

The previous day Meta reported better-than-expected quarterly results that sent the stock price up 7%. Still, Meta’s AR and VR bets continue to rack up losses — the company’s Reality Labs unit posted a $4.5 billion loss in the second quarter. That unit is responsible for the company’s Quest virtual reality devices and Ray-Ban smart glasses.

Since 2020, Meta has poured more than $63 billion in expenses into its hardware efforts. The company has yet to find meaningful success, but Wall Street has afforded Meta patience with Reality Labs because the company’s advertising business is thriving.

Meta brought in $131.9 billion in advertising sales for 2023, and reported net income of $39.1 billion for the year. By contrast, Snap recorded $4.6 billion in total revenue and a net loss of $1.3 billion in 2023.

“We are at a point where the challenge with Snap is that it is just functioning at a different scale than Meta,” said Leo Gebbie, a principal analyst and director at CCS Insight.

With Meta selling its Quest VR headsets at a loss in order to lead and influence the overall VR market, Gebbie said he expects the company to follow a similar aggressive pricing strategy if it debuts its own AR device. For Snap to compete, the company’s AR device must be “something really impressive” that incorporates the best of its core Snapchat app and appeals to the younger demographic that differentiates it from Meta, he said.

Snap doesn’t break out financials for its hardware efforts as Meta does, but the company has struggled to find success selling hardware.

Snap debuted its first internet-connected Spectacles glasses in 2016, pitching the $130 devices as an easy way for users to capture short, first-person videos that they could post on Snapchat. A year later, Snap disclosed that it wrote down nearly $40 million due to losses from unsold Spectacles, underscoring the challenges it faces selling consumer hardware products.

Since then, the company has released other versions of its Spectacles smart glasses, including a version for $380 in 2019. In 2021, it sold a pair of glasses with AR capabilities in limited numbers to developers and creators instead of the general public, making the product more of a prototype requiring further improvement before a wider release.

Beyond glasses, Snap said in 2022 that it would stop developing its Pixy flying camera drone just months after it released the $230 gadget.

In getting out ahead of Meta with its latest AR glasses, Snap is using a strategy taken by the Facebook parent last summer when CEO Mark Zuckerberg disclosed details of the company’s Quest 3 VR headset a week before Apple announced its much-anticipated Vision Pro VR headset.

Much of Meta’s AR strategy involves sprinkling some AR features into its Quest-branded VR headsets while simultaneously pushing its Ray-Ban Meta smart glasses, made in partnership with EssilorLuxottica. The two companies on Tuesday announced that they had extended their partnership to continue developing smart glasses.

Although Meta doesn’t release sales figures, Zuckerberg has told analysts that its Ray-Ban Meta glasses that went on sale in October “continue to do well and are sold out in many styles and colors, so we’re working to make more and release additional styles as quickly as we can.”

Snap CEO Evan Spiegel has centered the company’s hardware efforts around camera technology, which he believes is a natural fit with the core Snapchat app and its 850 million monthly active users.

It’s unclear how much longer investors will stomach Snap’s hardware push.

“We have seen the losses on Reality Labs grow quarter by quarter, and investors have indulged this because Meta is making enough profit from its advertising business,” Gebbie said. “Snap is hugely more constrained. It’s in a position where to meaningfully compete on hardware is going to be incredibly challenging.”

WATCH: Jim Cramer discusses Snap and the market