On Wednesday, BofA Securities updated its outlook on Reddit (NYSE: RDDT), significantly increasing the social media company's price target while keeping its rating unchanged.
With Reddit currently trading at $172.32 and sporting a market capitalization of $30.26 billion, analysts at BofA Securities now see the price target for Reddit at $180.00, a substantial rise from the previous $99.00, citing a shift in valuation perspective and promising revenue prospects.
According to InvestingPro data, Reddit has demonstrated impressive revenue growth of 48.7% in the last twelve months.
The adjustment reflects BofA Securities' decision to roll forward their valuation basis to 2026, applying a 16 times price-to-sales (P/S) multiple, up from the 10 times multiple used earlier. The firm's revised estimates are based on Reddit's potential for near-term revenue growth, which appears more favorable compared to peers that might face headwinds due to foreign exchange pressures and a deceleration in year-over-year advertisement growth.
InvestingPro analysis reveals Reddit maintains an exceptional gross profit margin of 89.25%, suggesting strong operational efficiency. Get access to 12+ additional ProTips and comprehensive financial metrics with InvestingPro.
Despite the raised price target, BofA Securities has maintained a Neutral rating on Reddit stock. The rationale behind this stance is rooted in scenario analysis, which suggests that the risk/reward balance for Reddit may not be as attractive as desired.
The analysis, detailed in Exhibit 7-9 of their report, indicates that although there is potential for revenue growth, the sector has seen revenue multiple compression among peers as post-initial public offering (IPO) advertisement growth rates tend to slow down. BofA Securities anticipates this trend could affect Reddit in the second half of 2025, even under a bullish case scenario.
The firm's analysts believe that while Reddit's advertisement growth is accelerating, it is important to consider the broader industry context. Historically, companies in the sector have experienced a contraction in revenue multiples following a period of rapid post-IPO growth. This pattern is something investors might need to be cautious about as it could emerge for Reddit in the latter part of 2025.
Reddit's stock price adjustment and the maintained Neutral rating reflect a mix of optimism about the company's revenue potential and caution due to the anticipated industry trends. The new price target is based on BofA Securities' updated estimates and the application of a higher P/S multiple, justified by Reddit's current performance and market position relative to its peers.
Based on InvestingPro's Fair Value analysis, Reddit appears to be trading above its Fair Value, with analyst targets ranging from $85 to $210. For deeper insights into Reddit's valuation and growth prospects, access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.
In other recent news, Reddit has been a focal point due to impressive financial performance and growth trajectory. The platform reported a 68% increase in total revenue and a 56% rise in advertising revenue.
Several financial firms, including Citi, Needham, and Baird, have shown confidence in Reddit's potential, adjusting their price targets upwards while maintaining positive ratings. Morgan Stanley (NYSE:MS) upgraded Reddit's stock from Equalweight to Overweight, setting a new price target of $200. Loop Capital also raised its price target for Reddit to $180.
These adjustments come on the heels of positive advertiser feedback, robust user engagement, and the introduction of new products such as Reddit Answers. Reddit's focus on user growth and average revenue per user (ARPU) expansion, particularly in international markets, is seen as a critical factor in the company's ability to capitalize on the anticipated favorable economic conditions.
However, Reddit recently encountered a major outage affecting thousands of users following a software bug fix, for which the company has not yet released a statement. Despite this setback, these recent developments underscore the positive outlook for Reddit's continued growth and financial success.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.