Reddit (RDDT) was upgraded to Buy from Hold at Loop Capital in a note Thursday, following a notable decline in its stock price.
The firm explained that the social media platform's shares, which retreated almost 20% since July 15, are now trading at 7.8 times the firm's 2025 estimated revenue.
Loop Capital maintained its $75 per share target for Reddit, representing a 23% upside potential.
Analysts at Loop Capital stated, "We continue to believe that there is likely upside to our and the Street's 2024 and 2025 estimates." They also highlighted the attractive current valuation despite anticipated selling pressure when the lockup expires on August 9.
Loop Capital believes that Reddit's users, revenue, and adjusted EBITDA are poised to exceed both their estimates and Street expectations. An incremental 1% increase in advertising ARPU and data licensing, including the OpenAI deal, is anticipated to boost 2Q revenue beyond the high end of guidance.
Furthermore, projected 2024 revenue is expected to surpass Street consensus with similar assumptions.
Reddit has secured partnerships with major sports leagues like the NFL, NBA, MLB, NASCAR, and PGA Tour. According to Loop Capital, "RDDT will share revenue with the leagues on ads attached to the content," similar to pre-Musk Twitter arrangements.
The firm also notes that Reddit's advertising has expanded to its conversation pages, which are the fastest-growing ad surface on the platform.
Despite the potential selling pressure due to the upcoming lockup expiration on August 9, where 82% of Reddit's shares will become eligible for sale, Loop Capital remains optimistic.
They believe that long-term investors such as Advance Publications and Tencent, along with significant holdings by insiders, provide a stabilizing factor.
Loop Capital's upgrade to Buy for Reddit reflects confidence in the company's strategic initiatives, user growth potential, and revenue prospects.