On Monday, Morgan Stanley (NYSE:MS) initiated coverage on Reddit (NYSE: RDDT) stock with an Equalweight rating and a set price target of $45.00.
The firm acknowledges Reddit's strong position as a unique and authentic platform and recognizes the potential for increased advertising revenue through continued innovation and performance enhancements. The analyst cites the high-margin data licensing as an additional growth opportunity for the social media company.
Reddit, described as a community of communities, offers a distinct appeal to users and advertisers due to its contextual and interest-based content. Morgan Stanley projects a compound annual growth rate (CAGR) of approximately 21% for Reddit's advertising revenue from 2023 to 2027. This growth is expected to be supported by seven identified drivers of advertising innovation.
The firm also highlights Reddit's established artificial intelligence-based data licensing business, which is anticipated to generate around $200 million in contracted licensing revenue over the next three years. This aspect of the business is seen as a high-margin call option for growth.
In addition to advertising and licensing revenue prospects, Morgan Stanley points to Reddit's impressive gross margins, which exceed 85%. The firm anticipates that Reddit will leverage its research and development, sales and marketing, and general and administrative expenses to achieve approximately 22% adjusted EBITDA margins by 2027, a significant improvement from the -9% margins reported in 2023.
Despite these positive indicators, Morgan Stanley maintains an Equalweight rating on Reddit stock, indicating a neutral stance. The firm is looking for further evidence of accelerated user growth or more rapid execution on the company's initiatives before considering a rating change. The price target of $45.00 implies a modest upside of about 2% from current levels.
InvestingPro Insights
Real-time data from InvestingPro paints a comprehensive picture of Reddit's financial health and market performance. The company's market capitalization stands at a robust $6.86 billion, underscoring its significant presence in the industry. Despite not having turned a profit over the last twelve months, analysts are optimistic, predicting profitability for Reddit this year. This aligns with Morgan Stanley's anticipation of strong revenue growth and improved EBITDA margins.
Reddit's impressive gross profit margin of 86.19% echoes Morgan Stanley's highlights, suggesting that the company's monetization strategies are paying off. However, it's worth noting that the stock is trading near its 52-week low, which could be an attractive entry point for investors believing in the company's long-term potential. The InvestingPro Tips also indicate that Reddit holds more cash than debt, providing a cushion for operational flexibility and potential investments.
Investors interested in a deeper dive into Reddit's financials and market performance can find additional InvestingPro Tips at https://www.investing.com/pro/RDDT. With the use of the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to 8 more InvestingPro Tips that could further inform investment decisions.
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