J.P.Morgan and Morgan Stanley have recently initiated coverage on Reddit (RDDT, Financial), assigning it ratings that suggest a wait-and-see approach. Despite their cautious stance regarding the social media platform's user growth, they remain optimistic about its potential for ad-revenue expansion and advancements in artificial intelligence (AI). This news has led to a slight increase in Reddit's shares, which rose by 0.88% to $42.64 during premarket trading.
Reddit, which went public last month, primarily generates revenue through advertising but has highlighted AI as a key growth area in its IPO marketing efforts. J.P.Morgan has given Reddit a "neutral" rating with a target price of $47, whereas Morgan Stanley has set an "equal-weight" rating with a $45 target price.
Analysts from J.P.Morgan, including Doug Anmuth, have noted that while Reddit's daily active unique users (DAUq) have seen a significant uptick in recent times and there's ample opportunity for further growth, its current user base of 73 million is considered relatively small. Both firms are adopting a wait-and-see approach, looking for clear indicators of substantial user growth and swift execution before adopting a more bullish stance.
The IPO saw participation from major financial institutions such as Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America as underwriters, all of whom had to adhere to industry norms by waiting until mid-April to commence coverage. Piper Sandler and Roth MKM emerged as the most optimistic, assigning "overweight" and "buy" ratings with a $50 price target, citing Reddit's iconic status on the internet and its premium valuation as the "front page of the Internet."
Despite its initial public offering (IPO) being priced at the upper end of its range at $34, Reddit's shares have since dipped below their debut price of $47. The platform gained immense popularity during the 2021 "meme-stock" phenomenon, where retail investors on its "wallstreetbets" forum orchestrated purchases of stocks like GameStop, which were heavily shorted. Additionally, brokerages Baird and Bernstein have also started covering Reddit earlier this month.
