By Siddarth S
(Reuters) -Major Wall Street brokerages, whose investment banking units helped Reddit prepare for public offering, have begun covering the social media company with doubts about its user growth, while remaining bullish on revenue advertising and the use of artificial intelligence. JP Morgan started with a “neutral” rating and a $47 price target, while Morgan Stanley had an “equal weight” rating and a $45 price target.
Reddit shares were trading at $42.80 before the bell, below its debut price of $47 last month.
“DAUq (daily active unique users) growth has accelerated in recent quarters and there is significant room for growth, but for now Reddit’s base of 73 million users is relatively sub-scale,” they JPMorgan analysts led by Doug Anmuth wrote in a note.
They estimated that DAUq will reach 109 million users by 2026, but these figures still lag behind competitors like Facebook’s Meta Platforms (NASDAQ:) and Elon Musk’s X by a wide margin.
“Reddit needs to demonstrate that it can grow significantly over time,” they said.
The social media company relies on advertising for much of its revenue, although it touted artificial intelligence in its initial public offering (IPO) as an area of growth.
Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America were among more than a dozen underwriters for Reddit’s IPO, all of which had to wait until mid-April to begin coverage as required by industry practice.
“The valuation leaves us on the sidelines as we wait for evidence of disproportionate user growth and faster execution,” Morgan Stanley said.
With a $50 price target, Piper Sandler and Roth MKM were the most bullish on the stock with “overweight” and “buy” ratings, respectively.
While Piper called Reddit an “iconic Internet resource,” Roth said the company is considered the “front page of the Internet” and deserves a premium rating.
“Reddit’s large, unique and fresh corpus of user-generated textual content is now increasingly valuable to AI models,” Roth analysts said.
Regarding the use of AI, JPMorgan said: “Reddit is in the early stages of monetizing ads, and the company’s body of historical information could be an attractive source for LLM (large language model) training.”
Reddit’s popularity rose to new heights during 2021’s “meme-stock” saga in which a group of retail investors collaborated on its “wallstreetbets” forum to buy shares of heavily shorted companies like GameStop (NYSE:).
Earlier this month, brokerages Baird and Bernstein initiated coverage on Reddit with concerns about whether the company would turn a profit.