Reddit Stock Surges as Jefferies Initiates 'Buy' Rating, Citing AI Strengths and Growth Potential

Reddit Stock Rises as Jefferies Calls Stock a 'Buy' on AI Strengths

Reddit's user growth reached its highest level in four years last quarter. Reddit (RDDT) shares climbed Wednesday after analysts at Jefferies initiated coverage of the social media platform with a "buy" rating, citing its success within Google search results and its artificial intelligence (AI) use cases. The firm issued a price target of $90 per share, a 27% premium over Tuesday's closing price and well above the analyst consensus from Visible Alpha. Reddit's user growth accelerated to 51% in the second quarter, the firm noted, its highest level in four years. A big reason for that is the success of a revamped web platform the company debuted last year, which has led to "deeper integration into Google search." The company's average revenue per user is actually well below rivals Pinterest (PINS) and Snapchat (SNAP), which suggests a "long runway for increased monetization," analysts said. Reddit's large library of user posts are a valuable resource for companies developing generative AI models, Jefferies said. The company has established about $325 million in contract licensing revenue over the next three years, led by deals with Alphabet's (GOOGL) Google and OpenAI. Going forward, the firm suggested that partnerships with companies such as Amazon (AMZN) and Anthropic could be in the cards, which would mean more high-margin revenue streams. Shares of Reddit climbed about 2% intraday Wednesday and are up about 43% since the company's IPO in March.

Reddit stock rises as Jefferies starts coverage at Buy By Investing.com

Investing.com -- Jefferies analysts initiated research coverage on Reddit Inc (NYSE:RDDT) stock with a Buy rating and a price target of $90, which implies over 27% upside from the last closing price. The firm said the valuation is based on $65 per share for Advertising and $25 per share for Data Licensing. Reddit shares rose 3% in premarket trading Wednesday. Jefferies estimates that the company's EBITDA will more than double in the next two years to approximately $450 million, which is 12% above the 2026 consensus. This growth is expected to be driven by a significant increase in users and an opportunity to close the monetization gap compared to peers. "RDDT is combining AI-driven product enhancements with a robust archive of contextual content to spur trial and engagement, resulting in recent user growth accelerating to the highest level in 2+ years," analysts said in a Wednesday note. A major factor contributing to this growth has been Reddit's deeper integration into Google (NASDAQ:GOOGL) search and the rollout of a faster web platform in May 2023. This, along with investments in AI and machine learning, have improved recommendation algorithms and user experience on the platform, leading to an increase in logged-in users. Jefferies notes that Reddit's revenue per user (ARPU) in the U.S. is currently approximately 75% and 45% lower than that of its peers Pinterest (NYSE:PINS) and Snap Inc (NYSE:SNAP), respectively. However, the investment bank predicts that the company's continued innovations in ad formats, targeting, automation, and partnerships will lead to an expanded advertiser base and increased spending. "We estimate RDDT maintains 20%+ revenue growth through '27, as accelerating ARPU growth helps offset decelerating user growth. We consider upside to ARPU the key driver of potential upside to our revenue estimates," it noted. Lastly, Jefferies highlights the value of Reddit's extensive database of user-generated content, which has attracted significant interest from third-party developers of generative AI models. Reddit has secured approximately $325 million in non-exclusive contract licensing revenue over the next three years, with major contributors including Google and OpenAI. "We believe expanding use-cases for Gen AI over time will attract new partnerships, resulting in additional high margin revenue streams and upside to consensus," the firm's analysts continued. They project the company will achieve approximately 50% EBITDA compound annual growth rate (CAGR) over the next three years (2024-2027), the highest within Jefferies's coverage. This translates to a 7% and 12% upside to 2025 and 2026 consensus estimates, respectively. Even stronger EBITDA growth is anticipated for the standalone Advertising segment.