Analysts kick off Reddit stock price coverage after quiet period

Here's what could happen to Reddit shares next.

Apr 16, 2024 - 06:30

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Analysts kick off Reddit stock price coverage after quiet period

Hey, Reddit, what's Snoo?

Snoo is the social-media platform's alien mascot, recognizable by an oval head, pom-pom ears, and an antenna.

The creature's name, a play on the question "What's new?" fits with Reddit's concept of being "the front page of the internet."

Founded in San Francisco in 2005, Reddit enables registered users to submit content such as links, text posts, images, and videos, which other members vote up or down.

Posts are organized by subject into user-created boards called “communities” or “subreddits.”

Reddit's name recognition skyrocketed during the meme-stock madness in 2021 when a group of retail investors collaborated on the "wallstreetbets" forum to buy shares of highly shorted companies like GameStop, hoping to force short-sellers to buy shares to cover their bearish positions.

GameStop’s price surged from under $3 to as high as $483 in late January of that year, causing hedge funds that had bet against it to lose billions of dollars. GameStop's meteoric rise was the subject of the film “Dumb Money.”

Several analysts are initiating coverage of Reddit.. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

SOPA Images/Getty Images

Reddit: IPO, Google deal, FTC inquiry

Reddit debuted on the New York Stock Exchange on March 21, with shares priced at $34, opening at $47, and soaring 48% by the end of the session. (The stock, at last check, was trading just above $40.)

The debut marked the end of a lengthy journey that began in 2021 when Reddit confidentially filed a draft of its IPO.

However, stocks were battered by Russia's war in Ukraine and the Federal Reserve's interest rate hikes, which froze much of the IPO market and delayed its plans.

The company officially filed its IPO prospectus with the Securities and Exchange Commission in February, detailing a net loss of $90 million for 2023 on revenue of $804 million.

The company also announced a deal with Google for $60 million a year, allowing the search engine giant to, among other things, train its artificial intelligence models on Reddit's content.

Reddit said in a regulatory filing that it had received a letter from the Federal Trade Commission on March 14 stating that the agency was “conducting a non-public inquiry focused on our sale, licensing, or sharing of user-generated content with third parties to train AI models.”

“Given the novel nature of these technologies and commercial arrangements, we are not surprised that the FTC has expressed interest in this area,” the company said. “We do not believe that we have engaged in any unfair or deceptive trade practice.”

Reddit analysts weigh in after quiet period ends

Most Wall Street analysts observe a 25-day quiet period following an IPO before issuing ratings. Now that the appropriate time has passed, several analysts have initiated coverage of the social media platform.

Roth MKM analyst Rohit Kulkarni initiated coverage of Reddit with a buy rating and a $50 price target.

In a research note to institutional investors, Kulkarni noted Reddit's status as the "front page of the Internet."

The analyst said the company's large, unique, and fresh corpus of user-generated text content is now increasingly valuable to artificial intelligence models.

Kulkarni said he believed in the company's ability to execute.

Needham initiated coverage of Reddit with a buy rating and a $55 price target.

The investment firm says Reddit's library of 18 years of human conversations, updated daily, is increasingly valuable for training large language models and for "social listening" for brands.

Training artificial intelligence

Generative artificial intelligence must understand questions from a wide variety of people and answer questions using popular terms and phrases. Reddit is the best source of this type of information, the analyst said.

Needham also says there are few substitutes, which should give Reddit pricing power.

Loop Capital analyst Alan Gould initiated coverage of Reddit with a buy rating and a $55 price target, too.

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In a research note, the analyst tells investors that last year, the company had stronger user and revenue growth than its social media peers, and this trend should continue in 2024.

The firm also cited what it said was Reddit's favorable financial model with above-20% revenue growth, mid-80% gross margins, and asset-light position with capital spending that is only 1% of revenue.

Citi initiated coverage of Reddit with a buy rating and $53 price target.

With engagement trends improving, monetization ramping and profit margins based on Ebitda expanding, Reddit is well positioned to continue growing its share of users' time and advertiser budgets, Citi analysts said.

The firm also cited the potential risks tied to some of Reddit's content and noted that it remains earlier on in its efforts to monetize ads.

But Citi also said that is an opportunity as Reddit expands its advertiser base and launches newer ad units for shopping, video and search.

The firm also said Reddit's deep body of data creates lasting data-licensing opportunities.

Morgan Stanley is taking a slightly more conservative stand. It initiated coverage of Reddit with an equal-weight rating and a $45 price target.

The analyst likes Reddit's position as a "unique, authentic platform" and sees opportunities to drive advertising revenue through innovation and performance improvements, with high-margin data licensing as a "call option."

However, the stock's valuation leaves the firm at an effectively neutral stance on the stock as it waits for evidence of even faster user and revenue growth.

Goldman Sachs also kicked off coverage of Reddit with a neutral rating but with only a $40 price target.

The investment firm said that it views Reddit as positively leveraged to several long-term secular growth themes across digital advertising.

Goldman sees debates about macroeconomic impacts on digital advertising, the trajectory of customers and budgets, and the industry's competitive dynamics as the biggest potential drivers of the stock's volatility in the coming year.

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