Analyst issues a warning as Reddit stock 'goes to the moon'

Reddit stock surged 20% at the market open on Tuesday, extending its strong gains since debuting via an initial public offering (IPO) last week. The company’s shares surged as high as $74.90, marking a new all-time high.

Blockbuster Reddit IPO

Tuesday’s surge in Reddit stock comes on the heels of a 30% jump a day earlier, with the social media platform continuing its upward momentum from its Thursday IPO. Launching at $34 per share, RDDT closed Monday trading at $59.80, with Reddit and its existing investors raising about $750 million from the offering.

On their NYSE debut day, the company’s shares rocketed 48%, rewarding its moderators, and users handsomely through a directed-share program similar to those used by Airbnb Inc (NASDAQ:ABNB), Rivian (NASDAQ:RIVN), and Doximity Inc (NYSE:DOCS).

OpenAI CEO and early backer of Reddit, Sam Altman, saw his investment soar to over $613 million after the offering.

Reddit's market debut marks the first significant social media company IPO since Pinterest (NYSE:PINS) in 2019.

Despite not having achieved an annual profit since its inception in 2005, Reddit stock attracted investors by showcasing its content as a valuable resource for artificial intelligence (AI) training programs.

Last month, reports revealed that Reddit had secured a data licensing agreement with Google (NASDAQ:GOOGL), valued at approximately $60 million annually.

While advertising remains Reddit's primary revenue source, the company has highlighted AI as a key growth sector during its IPO marketing efforts.

"At the core we are a growth company. Achieving our mission means that we want to grow users and community," said Jen Wong, Chief Operations Officer at Reddit.

In a 2021 private funding round, RDDT was valued at $10 billion. The positive response from the stock market to its IPO suggests that Reddit might have underestimated its valuation potential in attracting investor interest.

New analyst coverage on Reddit stock

In the aftermath of its strong NYSE debut, analysts at NewStreet Research initiated coverage on Reddit stock with a Neutral rating and a price target of $54. This price target implies a downside risk of over 20% based on Tuesday’s market price.

The analysts believe that RDDT is currently benefiting from the anticipation of increased data licensing revenue, particularly with Open AI, adding to its upside potential.

This development is seen as a significant opportunity, although the exact scale and long-term sustainability are yet to be fully assessed. With Sam Altman, CEO of Open AI, holding a 9% stake in Reddit, expectations are high for Open AI's integration.

Further, the brokerage firm said the company’s daily active users (DAUs) growth is the “#1 fundamental controversy,” projecting robust double-digit growth through 2027. This outlook is based on improvements in machine learning-driven retention and expanded translation efforts.

“Near-term, DAUq growth peaks during 2Q24 in our model, as the impact of moving from GOOGL’s AMP (OTC:AMLTF) to RDDT’s proprietary mobile web browser platform (and associated Google Search SEO benefits) begins to wane,” they wrote.

Also, enhancing advertiser diversity and auction bid density is seen as crucial for ad revenue growth, analysts noted.

In 2023, Reddit's top 10 advertisers accounted for 26% of its revenue, but there is an expectation for small and medium-sized business (SMB) penetration to enhance revenue diversification.

“Moreover, Retail (the largest category of online ad spending) is still just an “emerging” vertical for RDDT, and there is ample runway for growth from this dominant digital ad category,” they said.

These factors are expected to significantly influence the institutional narrative around Reddit's stock in the near to mid-term, NewStreet Research noted.