Reddit Inc. (RDDT) is a digital social media platform that allows its users to have discussions about various topics while creating content. It organizes communities and groups sorted on different topics of interest, known as subreddits, where users can engage by sharing their experiences, uploading images and videos, submitting links, and replying to one another.
Founded in 2005, Reddit's headquarters is located in San Francisco, California. The stock debuted on the NYSE via an initial public offering (IPO) in March 2024.
RDDT shares hit the market at an initial price of $34, and closed Monday's session at just about exactly double that price. The stock surged about 5.3% to start the week, as investors reacted enthusiastically to new content partnerships with five major sports leagues, including the NFL and NBA.
But while the stock attracted a new crop of buyers on Monday, one analyst is warning that this may be the worst time - and the worst price point - to buy Reddit stock. Here's why.
Reddit Starts Strong
Reddit announced its Q1 earnings on May 7, where it posted a revenue of $243 million. That was a 48% increase YoY, and surpassed estimates, as Wall Street was looking for $212.8 million in revenue. Ad revenue rose 39% to $222.7 million during the quarter. Although Reddit reported a loss of $8.19 per share, that was still narrower than analysts' expected $8.71 per share loss.
The social media site reported daily engagement of about 82.7 million users during the quarter, which also beat estimates; meanwhile, average revenue per user increased 8% from $2.72 to $2.94 per user.
For Q2, management expects revenue in the band of $240-$255 million, which also exceeded consensus estimates.
With quarterly earnings due out on Aug. 6, Wall Street expects Reddit to report a loss per share of $0.33 on revenue of $252.66 million.
Loop Capital Highlights a Key Risk for Reddit Stock
Analysts seem to feel the social news aggregator is fully valued at current levels, considering that Reddit stock closed Monday at a premium to its average 12-month price target of $64.53.
However, most analysts still call the stock a “Moderate Buy” overall. At present, out of the 15 analysts covering RDDT, there are 6 “Strong Buy” ratings, 1 “Moderate Buy” rating, 7 “Hold” ratings, and 1 “Strong Sell” rating.
Recently, though, Loop Capital cited valuation concerns in its downgrade of the stock to a “Hold” rating from its previous “Buy” recommendation. Loop has a price target of $75 on the stock, about 10% higher than Monday's close.
"RDDT shares are now trading at 10x our 2025 estimated revenue and are approaching our $75 price target. Even assuming likely upside to our 2024 and 2025 estimates, we do not believe the upside reward meaningfully outweighs the downside risk," wrote Loop in a July 15 note.
In particular, Loop highlighted Aug. 9 as a date to circle in red for RDDT stock, since a massive number of shares are set to be released via lock-up expiration.
For investors curious about the math, the brokerage firm continued: "82% of Reddit's shares, ~133M shares, are subject to the lock-up expiration on August 9… Insiders sold 6.7M shares in the IPO, but we would not be surprised to see some of its early investors take advantage of the stock's strong performance and the ability to sell shares," particularly with RDDT trading at roughly double its IPO price.
So, while Reddit stock was hot to start the week, this social media name looks like one to skip at current levels.
On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
