On Monday, JPMorgan began its coverage of Reddit (NYSE: RDDT), assigning a Neutral rating to the stock with a price target of $47.00, set for December 2024. The firm sees Reddit's vast array of over 100,000 subreddits as a unique platform for sharing information and engaging on specific topics and interests.
Despite being in the early stages of advertising monetization, with approximately $800 million in revenue for 2023, Reddit's extensive historical data is seen as a potential asset for training large language models (LLMs).
The company has witnessed a recent acceleration in Daily Active Unique (DAUq) user growth, suggesting room for expansion. However, with a current user base of 73 million, Reddit is considered relatively small in scale compared to the likes of Google (NASDAQ:GOOGL) and Meta (NASDAQ:META). The challenge for smaller digital ad platforms to compete with these giants lies in shifting towards performance-based advertising.
JPMorgan notes that Reddit has opportunities to enhance its advertising technology, develop its self-serve advertising capabilities, and increase the number of advertisers. Such improvements could support a revenue growth of over 20% in the coming years.
Additionally, Reddit's agreements for data licensing, which include over $200 million signed through 2026 primarily with Google, add an interesting generative AI perspective to the company's growth narrative. The firm anticipates other partnerships related to LLM could emerge.
Projected to achieve adjusted EBITDA margins of 15% by 2026, Reddit is expected to have high incremental margins and is considered capital expenditure light.
While JPMorgan acknowledges the potential for near-term gains, the firm remains cautious due to the need for greater confidence in the trajectory of DAUq over time, increased success in the competitive online advertising market, and Reddit's current valuation, which is nearly 5 times its estimated 2025 revenue.
The $47 price target is based on approximately 5.75 times Reddit's projected 2025 revenue and also corresponds to roughly 31 times its projected 2026 adjusted EBITDA.
InvestingPro Insights
As Reddit (NYSE: RDDT) navigates the competitive landscape of online advertising, real-time data from InvestingPro provides valuable context for investors. With a market capitalization of $6.86 billion and a notable gross profit margin of 86.19% for the last twelve months as of Q4 2023, Reddit’s financial health appears robust. The company’s liquid assets surpassing short-term obligations is a reassuring sign of financial stability. However, investors should be aware that the stock trades with high price volatility, which could impact short-term investment strategies.
Reddit's strategic focus on advertising technology and data licensing aligns with its impressive gross profit margins, suggesting that the company is leveraging its unique platform effectively. But it's important to note that Reddit is not profitable over the last twelve months, and is trading at a high revenue valuation multiple. Analysts predict the company will be profitable this year, which could be a turning point for investor sentiment.
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