Snapshot testing in Vue involves mounting a component and capturing its rendered HTML output. This output is saved as a snapshot file the first time the test runs. On subsequent runs, the test compares the current output to the saved snapshot. If they match, the test passes, confirming the UI has not changed unexpectedly. If they differ, the test fails, signaling a change in the component's output. Developers can then update the snapshot if the change is intentional or fix the component if it is a bug. This process helps maintain UI consistency and catch unintended changes early.