The Real Reason Why Snap Stock Will Keep Rallying

Snap (NYSE: SNAP) stock has defied its many vociferous critics, surging an incredible 79% since the beginning of the year. Snap stock has been hovering around $10, after falling below $5 as recently as the end of December.

The Real Reason Why Snap Stock Will Keep Rallying

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The critics of SNAP stock will point out that the shares are still nearly 45% below their year-ago levels. Still, everyone has to concede that the shares have made a tremendous comeback that few saw coming.

The Reasons for the Rally of SNAP Stock

Of course, it’s obvious that SNAP stock rallied partly due to the company’s better-than-expected fourth-quarter financial results and the tech sector’s comeback. Others will say that the key was SNAP’s ability to show the Street that its user base isn’t hemorrhaging, and that the key to stabilizing the user base was the company’s upgrade of its Android interface.

Both of these theories have some validity, but I think the key to the resurgence of SNAP stock was large stock buyers (a.k.a. “the big money”) realizing that the company, despite the nominal slow growth of its user base and intense competition from Facebook’s (NASDAQ: FB) Instagram, actually has a vibrant, rapidly growing business.

I believe that the main catalyst of that business, as I’ve stated many times in the past, is Snapchat’s ability to attract tens of millions of Generation Z and Millennial users whose spending power is rapidly increasing.

But this time, I thought it would be useful to provide concrete, quantitative evidence for my hypothesis.

Data Shows That Millennials, Gen Z Like Snapchat

First of all, data shows that American millennials (generally, people between the ages of 19 and 38) remain frequent users of Snapchat. Specifically, according to a mid-2016 survey by eMarketer, around 50% of millennials use Snapchat on their smartphones. Moreover, that percentage will actually increase slightly, to 55% in 2020, as these millennials age, the firm predicted.

A more recent, 2018 survey similarly showed that more than 50% of millennials open Snapchat daily.

And eMarketer also noted that a research firm called Fluent found in February 2017 that nearly 70% of U.S. Snapchat users between the ages of 25 and 34 use Snapchat either “at least once a day” or “all the time.” Among those between 18 and 24, that proportion rises to more than 75%.

Cumulatively, this data refutes the idea that most Snapchat users give up the website once they reach their early 20s. It also refutes the concept that Instagram has completely eclipsed Snapchat among millennials.

When it comes to Generation Z, identified as those ages 16-24 in 2018, one survey indicated that Snapchat has a definite edge over Instagram. A survey found that “58% of Gen Z respondents reported posting Snapchat Stories, as opposed to 39% posting Instagram Stories,” Marketing Charts noted in August 2018.

Millennials, Gen Z Spend a Great Deal of Money

Nor should anyone doubt that selling products to millennials and Generation Z is quite lucrative. According to Nielsen, for example, “multicultural millennials,” representing only 42% of all millennials, “spend over $65 billion per year.” And in a January 2018 study, Millenial Marketing estimated that Generation Z in total spends $143 billion annually.

By any measure, marketers have a tremendous amount of incentive to spend a great deal of money on convincing millennials and Gen Z to buy their products. And the data shows that advertising on Snapchat is a great way to accomplish that goal. SNAP stock is undoubtedly benefiting from this situation.

Additionally, as I’ve pointed out previously, as the earnings of millennials and Gen Z increase as they get higher-paying jobs, the attractiveness of advertising on Snapchat will only rise. Therefore, Snap’s financial results should continue to improve going forward, even if its user base doesn’t grow much or at all. Of course, this trend will continue to boost Snap stock going forward.

As of this writing, the author did not own shares in any of the companies mentioned. 

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