Home » Business » Reddit’s story hinges on ‘promises we’ve heard too many times,’ a new bear says

Reddit’s story hinges on ‘promises we’ve heard too many times,’ a new bear says

Reddit Inc. has a “compelling” near-term narrative ahead of it, according to a Bernstein analyst. The company was the leading social-media player in terms of user and revenue growth during the fourth quarter, and its targets for this year seem conservative.

That said, Bernstein’s Mark Shmulik initiated coverage of Reddit shares RDDT, -6.86% with an underperform rating on Wednesday afternoon, calling it an “institutional meme stock.”

Reddit “may be worth a tactical flyer with the stock likely trading on revenue beats/misses and an easy near-term setup,” Shmulik wrote. “But the longer-term promises — grow the ad base, profits just around the corner and the dream of all the non-ad upside — are promises we’ve heard too many times.”

He sees plenty of questions ahead of Reddit as he looks past 2024. Other small-scale social-media companies have had a difficult time showing off the targeting and measurement capabilities that advertisers get from the industry’s biggest players.

Read: How the AI potential of Reddit’s user data has helped send its stock soaring

“If Pinterest and Snapchat continue to struggle to live up to their potential with higher engagement/commercial intent, better ad tools and decent social graphs, what hope does Reddit have with their worst-in-class engagement, anonymous user base and NSFW content?” Shmulik asked.

Given the recent troubles those smaller social-media players have had, he thinks Reddit’s IPO timing isn’t so fortunate, since investors are “rightly asking whether these smaller social platforms are simply too sub-scale to compete in a privacy-centric world where scale and walled gardens matter more than ever.”

Meta Platforms Inc. META, +1.88% has spent heavily to rebuild its advertising-technology tools and get marketers to use them. But it’s even tougher for smaller companies to convince advertisers that it’s worth running campaigns on their platforms, which are often more effort-intensive than what they can achieve with the likes of Meta, Alphabet Inc. GOOG, +0.32% GOOGL, +0.23% and Amazon.com Inc. AMZN, +0.95%.

Shmulik set a $40 price target on Reddit shares, which were off almost 1% in Wednesday’s after-hours action.

Baird’s Colin Sebastian also launched coverage of the stock on Wednesday afternoon, assigning it a neutral rating and $50 target price.

“We believe that Reddit is a unique online platform creating meaningful value for advertisers from a growing user base, troves of user-generated content and a self-regulated (generally safe) environment,” he wrote. “However, shares are trading at premium multiples vs. mean internet and social-media comparables, and in-line with high-quality/fast-growth platforms.”

He flagged that the impact of artificial intelligence on Reddit is nuanced. While the company stands to benefit now as businesses look to train large language models off of Reddit data, Sebastian sees a future world in which generative-AI tools potentially make standalone information platforms less valuable.

See also: Reddit stock charges higher, even as it picks up a neutral rating

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