Reddit Faces Upgrade to Buy at Loop Capital After Stock Decline

Reddit (RDDT) has been upgraded to a Buy rating from Hold by Loop Capital, following a significant drop in its stock price. The firm noted that shares of the social media platform have declined nearly 20% since July 15 and are now trading at 7.8 times their projected revenue for 2025.

Loop Capital has maintained its price target for Reddit at $75 per share, suggesting a potential upside of 23%. Analysts from the firm expressed confidence that there may be positive developments regarding both their and Wall Street’s revenue estimates for 2024 and 2025. They also pointed to the current attractive valuation of the stock, despite the expected selling pressure from the lockup expiry on August 9.

The firm believes that Reddit’s user engagement, revenue growth, and adjusted EBITDA are likely to exceed not just their projections but also market expectations. They anticipate a modest 1% rise in advertising revenue per user and data licensing, boosted by a recent deal with OpenAI, could elevate second-quarter revenue beyond previously provided guidance.

Additionally, Reddit’s projected revenue for 2024 is expected to surpass consensus estimates under similar conditions. The platform has also formed partnerships with major sports leagues, including the NFL, NBA, MLB, NASCAR, and PGA Tour. Loop Capital noted that Reddit will share ad revenue with these leagues related to their content, akin to past advertising arrangements on Twitter.

Moreover, Reddit is expanding its advertising services to include conversation pages, which are currently the platform’s fastest-growing ad space. Despite potential selling pressures arising from the upcoming lockup expiration—during which 82% of Reddit’s shares can be sold—Loop Capital remains optimistic about the company’s outlook.

They pointed out that long-term investors such as Advance Publications and Tencent, combined with substantial insider ownership, could provide a stabilizing influence on the stock. Loop Capital’s upgrade to a Buy rating reflects their confidence in Reddit’s strategic plans, growth potential, and revenue opportunities.