Reddit got off to a hot start with its initial public offering. But there are "too many questions" on the horizon to consider Reddit stock a buy, an analyst wrote late Wednesday.
Analysts with Bernstein initiated research coverage of Reddit stock with a bearish underperform rating, and a price target of 40. On the stock market today, Reddit fell 2.6% to close at 45.78. Shares lost 7% in Wednesday trading.
With revenue growing last year by more than 20% and "conservative" 2024 targets, Bernstein analysts say Reddit has a good setup in the short-term. But it could struggle longer-term competing against tech giants that have held back social media platforms such as Snapchat and Pinterest.
"(Reddit) may be worth a tactical flyer with the stock likely trading on revenue beats/misses and an easy near-term setup," the team of Bernstein analysts led by Mark 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."
Reddit Stock: Comparison To Meta, Pinterest, Snap
Reddit's biggest challenge is standing out as a smaller scale digital advertising player, Shmulik said. The market is increasingly dominated by Google parent company Alphabet, Facebook parent company Meta and Amazon.
"We've seen the demand constraints that smaller social platforms have faced — the structural limitations to ad targeting, measurement, and consumer purchasing intent is real," Shmulik wrote. "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?"
Reddit last year had sales of $804 million, up 21% from 2022. But the company lost about $91 million in 2023 and has yet to turn a profit.
Still, the stock surged as much as 70% beyond its 34 offering price when it began trading on the New York Stock Exchange on March 21. But it has lost ground since. Shares are trading slightly above Reddit's eventual listing price of 44 as of market close Thursday.
Reddit has three analyst ratings now, according to FactSet. Baird also initiated coverage of Reddit on Wednesday, with a neutral hold rating and price target of 50.
Meanwhile, New Street Research has a hold rating on the stock. The firm set a price target of 54 in a client note last week.
