Reddit Analyst Points To 'Low-Hanging Fruit' That Could Mean 20% Revenue Growth In 'Next Few Years'

Investing in Reddit, Inc RDDT the social media platform renowned for its diverse range of communities, has captured the attention of many stock market enthusiasts. As Reddit embarks on its journey as a publicly traded company, investors are keenly eyeing its potential for growth and profitability.

The Reddit Analyst

JPMorgan analyst Doug Anmuth recently shared his insights on Reddit's potential trajectory in an initiating coverage note. Anmuth initiated coverage of Reddit with a Neutral rating and set a price target of $47 by December 2024. This target suggests an 11% upside from current levels, reflecting cautious optimism about Reddit's future performance.

Let's delve into the key points highlighted by Anmuth and what they mean for investors.

The Reddit Thesis

Compelling Narrative with Early-Stage Ad Platform & AI/Data Licensing Upside Potential

One of Reddit's strengths lies in its compelling narrative as a digital city hosting over 100,000 subreddits. This diverse ecosystem fosters engagement, knowledge-sharing, and interaction among users with similar interests.

However, Reddit is still in the early stages of monetizing its advertising potential, with approximately $800 million in revenue generated in 2023, the analyst says.

Anmuth highlights Reddit's significant room for growth in its user base, particularly in Daily Active Unique (DAUq) metrics. Despite its 73 million user base, Reddit remains relatively sub-scale compared to larger platforms. “Reddit has low-hanging fruit in improving ad tech, building out self-serve, & growing
advertiser count, which should help support 20%+ revenue growth the next few years,” says Anmuth.

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The platform’s engagement metrics, coupled with its unique data corpus, make it an attractive prospect for advertisers seeking highly targeted ad placements.

Furthermore, Reddit's foray into data licensing agreements, particularly with Alphabet Inc GOOG GOOGL dba Google, presents additional upside potential. “Data licensing brings an intriguing Gen AI angle to the story,” per Anmuth.

These partnerships not only provide revenue streams but also offer opportunities for collaborative AI initiatives, leveraging Reddit's vast repository of historical data.

Challenges and Considerations

While Reddit exhibits promise, Anmuth emphasizes the challenges it faces in the competitive online advertising landscape. Smaller digital ad platforms often struggle to compete with industry giants like Google and Meta (formerly Facebook). Reddit must demonstrate strong execution in improving its ad tech infrastructure, expanding its advertiser base, and optimizing its self-serve capabilities to remain competitive, the analyst says.

Valuation and Outlook

Despite Reddit's growth potential, Anmuth notes that its valuation is healthy, trading at approximately 5 times its estimated 2025 revenue. This places it ahead of peers like Snap Inc. SNAP and Pinterest Inc. PINS.

While there may be upside potential in the near term, Anmuth advises caution, particularly in assessing Reddit's DAUq trajectory and its ability to navigate the challenges of the online advertising landscape.

As Reddit prepares for its first public earnings report on May 7, investors will be keenly observing its performance and trajectory, particularly in revenue growth and user engagement metrics.

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