What happened

The market had a good first week of October, rebounding somewhat from September's 9% drop. But shares of Snapchat's parent company, Snap (SNAP -1.04%), are performing even better. As of noon on Friday, Snap stock is up 10% this week, according to data provided by S&P Global Market Intelligence, compared to the 2% positive return for the S&P 500. And it's because Wall Street is becoming increasingly optimistic about the state of the digital advertising space.

So what

Analysts Thomas Champion and Doug Anmuth, of Piper Sandler and J.P. Morgan, respectively, are both encouraged by what they're seeing in the digital ad market, based on commentary they made early this week. Snap's ad rates have fallen as the U.S. economy has struggled. But according to The Fly, Champion thinks ad rates stopped dropping for Snap back in July. Snap's own management said that revenue three weeks into the third quarter of 2022 was flat year over year, mirroring Champion's thoughts.

On Wednesday, Ross Sandler of Barclays went a step further. Sandler is also encouraged by digital ad trends. And this is partly why he raised his price target for Snap stock from $15 per share to $21 per share, according to The Fly.

With the stock down 87% from its all-time high, it goes without saying that investors had a negative outlook for Snap. However, with the narrative slightly improving, Snap stock was able to bounce back this week.

Now what

Snap stock's move this week is a reminder of how dependent the company is on favorable ad rates. However, it's pursuing new revenue streams, including its augmented-reality (AR) platform for enterprises. Snap already had enterprise partners using its AR tech, but it's aiming for paying customers in the near future. This could make it less dependent on ads in the future.

However, for now, Snap generates most revenue from ads. Therefore, this remains the most important thing for shareholders to watch.