Jefferies Analysts Rate Reddit Inc (NYSE:RDDT) as Buy

Jefferies analysts have initiated coverage on Reddit Inc with a Buy rating and a price target of $90, suggesting an increase of over 27% from the last closing price.

The valuation includes $65 per share for Advertising and $25 for Data Licensing.

In premarket trading on Wednesday, Reddit shares rose by 3%.

Jefferies estimates that Reddit's EBITDA will more than double to approximately $450 million in two years, which is 12% above the 2026 consensus. This is expected due to a significant rise in users and the opportunity to close the monetization gap with competitors.

The analysts commented, “RDDT is combining AI-driven product enhancements with a robust archive of contextual content to spur trial and engagement, resulting in recent user growth accelerating to the highest level in over 2 years.”

A major contributor to this growth has been the deeper integration of Reddit in Google search and the launch of a faster web platform in May 2023. Investments in AI and machine learning have improved both recommendation algorithms and the user experience, which led to more logged-in users.

Currently, Reddit's ARPU in the U.S. is about 75% and 45% lower than that of Pinterest and Snap Inc, respectively. Nonetheless, Jefferies predicts that continued innovations in ad formats, targeting, automation, and partnerships will expand the advertiser base and increase spending.

Jefferies expects Reddit to maintain 20%+ revenue growth through 2027, as rising ARPU growth helps mitigate slowing user growth. The firm identifies ARPU upside as a crucial factor for revenue estimates.

Additionally, Jefferies emphasizes Reddit's extensive database of user-generated content, attracting interest from third-party developers of generative AI models. Reddit has secured about $325 million in non-exclusive contract licensing revenue over the next three years, with key contributors such as Google and OpenAI.

Analysts project that expanding use-cases for Gen AI will lead to new partnerships, generating high-margin revenue streams and potential upside to consensus estimates.

They predict a 50% EBITDA CAGR from 2024-2027, which is the highest in Jefferies's coverage, translating to a 7% and 12% upside to the 2025 and 2026 consensus estimates, respectively. Stronger EBITDA growth is also anticipated for the standalone Advertising segment.