Reddit Stock Price Target Raised by Analysts Before Earnings Report

Reddit (RDDT) is encouraging users to dive in, but not like a boxer throwing a match. The social media giant's slogan, "Dive into Anything," invites people to explore its vast content.

Reddit, established in San Francisco in 2005, allows registered users to post links, text, images, and videos, which other users can vote up or down. These posts are sorted into user-created communities called "subreddits."

Reddit gained significant attention during the 2021 meme-stock surge, where retail investors on the "wallstreetbets" subreddit collaborated to buy shares of heavily shorted companies like GameStop (GME), aiming to force short-sellers to cover their positions. This event was depicted in the 2023 film "Dumb Money."

In March, Reddit went public, and in May, it held its first earnings call as a public company.

CEO Discusses AI Investments

Steve Huffman, Reddit's co-founder and CEO, stated during the call, "We believe that great companies thrive in public markets, and we’re proud to have made this transition this quarter. Our IPO was a significant milestone for the company."

For its first quarter, Reddit reported a loss of $8.19 per share on $243 million in revenue. The platform reported 82.7 million daily active users, exceeding the expected 76.6 million.

"Reddit is seeing more visitors than ever," Huffman said. "It's one of the largest platforms for genuine connections and conversations online, and more people are finding and valuing this." He also emphasized the company's investments in machine learning and AI to enhance user experience and moderation.

"We use machine learning to help users find communities they’ll enjoy, boosting engagement across the platform," he added.

Recently, Reddit announced a collaboration with OpenAI to integrate its content with ChatGPT, the virtual assistant developed by the Microsoft (MSFT)-backed AI company, launched in November 2022.

This partnership will allow Reddit content to be accessible through ChatGPT and other new products, helping users discover and engage with Reddit communities via Reddit’s Data API, which provides real-time, structured content.

Reddit also launched a partnership program with major sports leagues, including the NBA, NFL, Major League Baseball, and NASCAR.

Analysts Adjust Stock Price Targets

Reddit is set to release its second-quarter results on August 6, prompting analysts to adjust their stock price targets.

Roth MKM analyst Rohit Kulkarni increased Reddit's price target to $67 from $61, maintaining a buy rating on the shares. He included contributions from the OpenAI partnership but warned that shares might face pressure as IPO lockups expire on August 9, referring to the period after going public when early investors are restricted from selling shares.

Additionally, Morgan Stanley raised Reddit's price target to $70 from $63, keeping an equal weight rating on the shares. The firm previewed Q2 EPS for the North American Internet group, noting Amazon (AMZN) as its top mega-cap pick.

Bernstein analyst Mark Shmulik increased Reddit's price target to $50 from $45, maintaining an underperform rating. He revised near-term estimates higher due to the OpenAI partnership announced in May, expecting it to contribute 500 to 800 basis points to revenue starting in the third quarter.

Shmulik noted that second-quarter data showed strong performance, with web traffic up 38% year-over-year and Google as the primary traffic source. However, he mentioned that the real test for Reddit will be in the third quarter when Google's algorithm changes could impact web traffic and ad revenue.

Future Growth and User Engagement

Reddit's growth is not just about numbers; it's also about enhancing user experience. The platform’s focus on AI and machine learning aims to make content more relevant and engaging for users. By improving the way content is recommended and moderated, Reddit hopes to create a more enjoyable and interactive environment for its users.

The partnership with OpenAI is particularly notable. ChatGPT's integration means that users can interact with Reddit content in new and innovative ways. This could attract more users to the platform, increase time spent on the site, and boost overall engagement. This strategic move aligns with Reddit’s goal to become a leading source of information and community-driven discussions on the internet.

Moreover, Reddit’s collaborations with major sports leagues such as the NBA, NFL, MLB, and NASCAR provide users with exclusive content like video highlights, behind-the-scenes footage, and interactive sessions. These partnerships not only enhance user experience but also attract sports fans to the platform, potentially increasing user engagement and retention.

Challenges and Considerations

Despite the positive outlook, Reddit faces several challenges. The expiration of IPO lockups could lead to increased volatility as early investors might sell their shares. This could put downward pressure on the stock price in the short term.

Furthermore, the changes in Google’s algorithm could significantly affect Reddit’s web traffic and ad revenue. As search engines play a crucial role in driving traffic to the platform, any negative impact on search visibility could affect Reddit’s growth.

Investors should also consider the competitive landscape. Other social media platforms and online communities are constantly evolving, and Reddit needs to continuously innovate to stay ahead. The company’s focus on AI and strategic partnerships is a step in the right direction, but it will need to maintain this momentum to ensure long-term success.

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