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Reddit (NYSE:RDDT) was in the spotlight Thursday as investment firm Baird began coverage on the new public social network with a Neutral rating.
“We believe Reddit is a unique online platform that creates significant value for advertisers in a growing industry user base, treasure troves of user-generated content, and a self-regulating (generally safe) environment,” analyst Colin Sebastian wrote in a note. “However, shares trade at premium multiples relative to the Internet and social media average comparable, and in-line with high-quality/fast-growing platforms.”
In addition to the Neutral rating, Sebastian set a $50 price target on Reddit stock.
Reddit priced its initial public offering at $34 per share late last month, raising $748 million in the process.
Pros of the story
Reddit’s user base is believed to remain on a “strong growth trajectory,” Sebastian said, having increased 27% year over year in the fourth quarter of 2023. He expects it to grow another 16% in 2024, while forecasting the average revenue per user also increased.
Reddit has an average of 73 million daily active unique users, approximately 267 million weekly unique users, more than 100,000 active communities, and approximately 1 billion cumulative posts.
Sebastian also expects a “healthy and expanding” margin profile, as operating margins and EBITDA are expected to “increase significantly” in the coming years as the company benefits from strong revenue growth and expense control.
AI, stock risks meme
Investors may have received Reddit warmly, partly because of its fascination with artificial intelligence, but it could be a mixed bag for the San Francisco-based company, Sebastian said.
“In the near term, we believe demand for Reddit data will adjust [large language models] and other AI applications is clearly a positive and there will likely be more revenue from data licensing,” Sebastian wrote. “Additionally, we expect the visibility of Reddit content to increase as conversational search applications expose more content about connections. However, the long-term impacts are less clear to us, as user interfaces evolve and large platforms take up a larger share of user time (and monetization), possibly disintermediating standalone information apps.”
Reddit recently signed a content licensing deal with Alphabet’s (GOOG) (GOOGL) Google, reportedly worth $60 million per year. The deal will give Google access to Reddit content to train the search giant’s artificial intelligence models. However, the deal caught the attention of the US Federal Trade Commission.
The risk of becoming a “meme stock” is also a concern, Sebastian said, as share price performance could become “disconnected from fundamental valuations.”