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Reddit Stock Surges as Jefferies Initiates Coverage with Buy Rating

Jefferies analysts have begun research coverage on Reddit Inc., assigning a Buy rating with a target price of $90, suggesting over 27% upside potential from the last closing price.

The valuation is derived from a projected $65 per share for advertising and $25 per share for data licensing. In premarket trading Wednesday, Reddit shares rose by 3%.

The firm anticipates that the company’s EBITDA will more than double over the next two years, reaching approximately $450 million, which is 12% above the consensus for 2026. This expected growth is attributed to a significant increase in user engagement and efforts to close the monetization gap relative to its competitors.

Analysts highlighted that Reddit is leveraging AI-driven product enhancements along with its extensive collection of contextual content, which has recently spurred user growth to its highest level in more than two years.

A key driver of this growth has been Reddit’s deeper integration with Google search and the introduction of a faster web platform in May 2023. Investments in artificial intelligence and machine learning have enhanced recommendation algorithms, improving the user experience and boosting the number of logged-in users.

Currently, Reddit’s revenue per user (ARPU) in the U.S. is about 75% and 45% lower than that of its peers, Pinterest and Snap Inc. However, Jefferies expects that ongoing innovations in advertising formats, targeting, automation, and partnerships will broaden the advertiser base and increase overall spending.

The analysts estimate that Reddit will achieve over 20% revenue growth through 2027, as rising ARPU offsets slower user growth. They consider the potential for increased ARPU as a key factor in driving revenue growth.

Additionally, Jefferies emphasizes the importance of Reddit’s vast database of user-generated content, which has gained significant interest from developers of generative AI models.

Reddit has secured around $325 million in non-exclusive contract licensing revenue over the next three years, with major contributions from companies like Google and OpenAI.

The analysts believe that expanding applications for generative AI will lead to new partnerships, additional high-margin revenue streams, and an upside to consensus estimates.

They project a compound annual growth rate (CAGR) of approximately 50% for EBITDA over the next three years (2024-2027), the highest within Jefferies’s coverage. This translates to a 7% and 12% upside to the consensus estimates for 2025 and 2026, respectively. The Advertising segment is expected to experience even stronger EBITDA growth.

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