Reddit stock is a buy, Roth says

The front page of the internet deserves a premium valuation.

That’s the assessment from Roth MKM analyst Rohit Kulkarni, who on April 15 initiated coverage of Reddit (Reddit Stock Quote, Chart, News, Analysts, Financials NYSE:RDDT) with a “Buy” rating and a price target of $50.00.

“Reddit is regarded as the “front page of the Internet” with >500mn monthly visitors, >250mn weekly uniques, and >75mn daily uniques. Reddit’s large, unique, and fresh corpus of user-generated text content is now increasingly valuable to AI models, in our opinion. We believe in Reddit’s mgmt. team’s ability to execute. Near-term risk is that Reddit is trading at a premium to peers, despite being ~18+ months away from GAAP profitability,” the analyst began.

For those who are less aware of the Reddit phenomenon, Kulkarni gave a rundown of the scale of what it is and what it has become.

“Reddit is a vast network of communities based on people’s interests,” he wrote. “Founded in 2005, Reddit has evolved to become one of the Internet’s largest corpuses of information, with over one billion posts and over 16 billion comments through December 31, 2023. To put that in perspective, Wikipedia has roughly 75 million pages. Reddit is divided into communities, called “Subreddits,” where members can interact based on specific interests and topics. Within these “Subreddits,” posts are conversation threads, and receive upvotes and downvotes that dictate the organization of posts in users’ community feed. Based on a survey commissioned by Reddit of roughly 800 U.S. platform users, 95% of respondents said there is a community for everyone on Reddit, 85% said Reddit is where they go to learn about the topics they love the most, and 83% recognized conversations on Reddit as more on-topic than anywhere else on
social media. Reddit’s core values, such as privacy, distinguish the platform for users seeking in-depth engagement with specific topics that benefit from a broad range of trustworthy opinions. During its 18-year journey of fostering connections and entertainment, Reddit has facilitated peer-to-peer sharing of information on any subject in an unmatched way and is comprised of a notably unique user base.”

Kulkarni thinks Reddit will post EBITDA of $6.9-million on revenue of $978.1-million in fiscal 2024. He expects those numbers will improve to EBITDA of $99.7-million on a topline of $1.2-billion in fiscal 2025.

The analyst says Reddit’s investment positives are its high average revenue per user, the growing value of data, and its full-funnel advertising potential. He sees risks such as the fact that it is still unprofitable, some NSFW content, and weakness in automating ads for Small and Medium Sized Businesses.