Reddit's Enhanced Advertising Tools Drive 'Sizable Upside': JPMorgan

Reddit Inc RDDT shares are on the rise following the company’s impressive first-quarter sales performance, which surpassed expectations.

Reddit’s stock surged 14.82% in pre-market trading on Wednesday, as it reporting Q1 earnings after the market closed on Tuesday. Reddit’s Q1 earnings per share (EPS) beat estimates by 5.97%, and its revenue exceeded expectations by 14.16%. The strong sales results, coupled with upbeat Q2 revenue guidance, have fueled investor optimism and driven the stock’s positive momentum.

The Reddit Analyst

JPMorgan analyst Doug Anmuth maintained his Neutral rating on Reddit stock, emphasizing the need for sustained execution and growth against tougher competition in the online ad market.

However, he raised his price target on the stock from $47 a share to $57 a share. The raised price target is based on about 7 times estimated 2025 revenue, which also equates to about 31 times estimated 2026 adjusted EBITDA. Anmuth believes Reddit needs to prove the sustainability of its strong growth against tougher comparisons in the next few quarters.

The Reddit Thesis

Anmuth highlighted significant achievements and potential challenges.

Reddit’s Q1 Achievements

Reddit experienced strong growth, with daily active users (DAUs) increasing for the fourth consecutive quarter, reaching approximately 83 million. This growth, including a 10 million increase Q/Q and a 37% Y/Y growth rate, represents the largest surge in three years. “Reddit's ad stack enhancements drove sizable upside,” noted Anmuth.

On the revenue front, Reddit reported impressive figures, with revenue growing nearly 50% Y/Y to $243 million, exceeding both JP Morgan and consensus estimates. The large customer service channel, which accounts for 60% of total revenue, also saw broad-based growth. “We look for Reddit Pro to serve as an acquisition funnel as well for advertisers,” said Anmuth.

3 Key Catalysts

Specifically, Anmuth pointed to 3 key aspects driving upside for Reddit stock:

1. The DAU success can be attributed to Reddit’s strategic investments in rebuilding its web and app platforms, which “continue to improve speed” and enhanced user experience.
2. Machine learning enhancements have increased content relevancy, further driving user engagement.
3. Revenue growth was not solely due to the recovering ad market but also to Reddit’s successful ad stack enhancements, which “drove sizable upside”. The company’s efforts to diversify its advertiser base have borne fruit, with the mid-market and SMB advertisers growing faster than the overall business.

Challenges That Remain

Reddit’s strong first-quarter performance underscores its potential for future growth, but challenges remain. Anmuth’s analysis suggests that Reddit shares are fairly valued, reflecting the need for the company to demonstrate sustained execution and growth in the coming quarters to justify further upside. Looking ahead, Anmuth remains cautiously optimistic, raising the 2024 and 2025 revenue estimates by 11% and 12%, respectively.

RDDT Price Action: Shares of Reddit were up 2.2% to $50.16 at the time of publication Wednesday.

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