Bernstein analyst Mark Shmulik recently initiated coverage of Reddit (NYSE: RDDT), indicating a pessimistic outlook for the social media company. He assigned an “underperform” rating along with a price target of $40. As of the current stock price, this target suggests a potential downside of approximately 16%.
Empty promises
The analyst’s primary argument revolves around skepticism regarding Reddit’s ability to fulfill the promises it made prior to its IPO. The company’s strategy focuses on expanding its user base, enhancing user engagement through improved tools, and attracting advertisers by refining its platform.
Shmulik highlights that similar strategies were implemented by other social media firms that have encountered difficulties post-IPO, such as Pinterest and Snap. Pinterest’s stock has plummeted by 62% since its peak during the pandemic, while Snap’s stock has experienced an 87% decline.
Bernstein also raises concerns about Reddit’s anonymous user base, which may present challenges in monetization, as well as the platform’s adult content, which could deter advertisers.
Is Reddit stock a buy or sell?
Reddit carries a hefty valuation of approximately $7.6 billion, posing a considerable challenge for a company that still needs to demonstrate its ability to drive revenue and profitability in the public market. In an industry where numerous players have grappled with similar hurdles, Reddit’s task is particularly daunting.
Despite generating revenue of $804 million in 2023, the company reported a net loss of $91 million and negative free cash flow amounting to $85 million. Despite these financial metrics, Reddit has been awarded a premium valuation, sporting a price-to-sales ratio of nearly 10. This valuation surpasses that of peers like Pinterest, which trades for less than 8 times sales, and Snap, which trades for less than 4 times sales.
Should Shmulik’s concerns materialize, Reddit’s stock could potentially plummet well below his $40 price target as investors reevaluate the company’s prospects. Until Reddit can validate its position, exercising caution by avoiding the stock appears prudent.
