Thursday Apr 18 2024 10:54
6 min
Leading Wall Street brokerages, which had roles the recent Reddit IPO, have now initiated coverage of the social media firm, expressing concerns about its potential for user growth while remaining optimistic about its advertising revenue and the prospects for its artificial intelligence (AI) capabilities.
Goldman Sachs and J.P. Morgan issued “neutral” ratings on Reddit shares with respective price targets of $40 and $47, whereas Morgan Stanley assigned an "equal-weight" rating with a price target of $45.
Reddit stock last traded $39.57 (up 1.02%) in premarket hours on Thursday — below the debut price of $47 from last month. The shares, which trade under the RDDT ticker on the NYSE, last closed at $39.17 (-4.79%) on Wednesday, April 17.
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Projections show Reddit's daily active users reaching 109 million by 2026, yet these numbers are still significantly behind competitors such as Meta Platforms' Facebook and Elon Musk's X.
In a note cited by Reuters on Tuesday, J.P.Morgan analysts led by Doug Anmuth wrote:
"DAUq (daily active unique users) growth has accelerated in recent quarters and there is meaningful headroom for growth, but for now Reddit's base of 73 million users is relatively sub-scale. Reddit needs to prove it can meaningfully scale over time".
Advertising remains a major source of income for Reddit, despite the company highlighting AI as a key growth area in its IPO.
Over a dozen underwriters, including Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America, took part in the Reddit IPO and were subject to a mid-April start date for Reddit stock coverage, as per industry norms.
Deutsche Bank, Raymond James, Needham, Piper Sandler, and Roth MKM were particularly optimistic, with Needham setting the highest Wall Street price target for Reddit stock at $55.
Piper Sandler described Reddit as an "iconic internet asset," and Roth referred to the platform as the "front page of the Internet," deserving of a premium valuation.
"Reddit's large, unique, and fresh corpus of user-generated text content is now increasingly valuable to AI models," Reuters cited Roth analysts as saying.
In another comment, J.P. Morgan analysts commented on Reddit’s potential use of AI:
"Reddit is early in ads monetization and the company's corpus of historical information could represent a compelling source for LLM (large language model) training."
"From a data monetization perspective, the data corpus of authentic human conversation at Reddit is unique," added analysts from Raymond James.
Reddit is a social news website and forum where stories are curated and promoted by its users. The platform’s name is a play on the words "I read it."
Reddit site members, also known as redditors, submit content then voted on by other members. The goal is to send well-regarded content to the top of the site's front page.
The platform is made up of over 100,000 topic-focused communities, known as “subreddits,” which each follow their own rules and culture.
Since its launch in 2005, Reddit has established itself as a pillar of social media, known for its iconic logo and vast range of forums covering a wide array of topics. Co-founder and CEO Steve Huffman has credited a subreddit with helping him quit drinking. The platform has also hosted notable figures like former U.S. President Barack Obama, who did an AMA (“ask me anything”) with the site’s users in 2012.
Reddit gained significant attention during the 2021 "meme-stock" phenomenon, when users on its "wallstreetbets" forum orchestrated buying sprees of heavily shorted stocks like GameStop.
Despite its influential role in digital culture, Reddit has yet to achieve the commercial success of larger rivals like Meta Platforms' Facebook and Elon Musk's X. Concerns about Reddit’s profitability were echoed by the brokerages Baird and Bernstein, which began covering Reddit stock earlier this month.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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