Reddit Inc. Shares Rise on Upgrade

Shares of Reddit Inc. rose more than 3% in pre-market trading on Monday after Morgan Stanley upgraded the company to "overweight" with a price target of $200.

Strong Engagement and Advertising Pipeline

Analysts emphasized Reddit’s strong engagement and advertising pipeline as key drivers for future growth. They noted the platform's potential to surpass rivals in user engagement, time spent, and advertising revenue growth.

Investment in Engagement and Advertising Innovations

Morgan Stanley highlighted Reddit's significant investment in six areas of engagement and seven advertising initiatives, indicating these are still in early stages. Advancements in machine learning and ad automation are expected to produce high returns.

Industry-Leading Margins

The brokerage stated that Reddit is positioned to maintain industry-leading incremental margins while expanding its user base and monetization capabilities.

User Growth Exceeding Expectations

Engagement is crucial for Reddit's growth strategy. The platform's U.S. daily active users for 2024 have already surpassed initial forecasts by 20%. This success is credited to enhanced content discovery, streamlined onboarding, and increased Google traffic.

Opportunities for Further Growth

Analysts pointed to initiatives like improved content personalization, enhanced video and conversation tools, and better search capabilities as key opportunities for further user growth and engagement.

Innovations in Advertising

Morgan Stanley identified seven areas of innovation in Reddit's advertising efforts, likening them to tools from Google and Meta that have shown positive advertiser return on investment.

Growth Projections

Financial projections indicate a 35% annual growth in U.S. ad revenue from 2024 to 2027, with Reddit’s global ad revenue expected to reach approximately $3.1 billion by 2027. This growth could lead to $1 billion in EBITDA by 2026 and $1.4 billion by 2027.

Price Target and Bull Case

The new price target of $200 represents a 23% upside from current levels, applying a 36x EV/EBITDA multiple to 2026 estimates. The bull case predicts an 85% upside with a $300 price target.

Promising On-Platform Search

On-platform search shows promise, with over 1 billion monthly searches potentially driving engagement and monetization gains starting in 2026.

Path to Profitability and Inclusion in S&P 500

Morgan Stanley pointed out that reaching GAAP profitability by early 2025 could lead to Reddit’s inclusion in the S&P 500, attracting further investor interest.

Risks Ahead

However, the note warned of risks, including challenges in sustaining user and revenue growth and competition from larger platforms like Meta, Google, and Amazon, which continually enhance their offerings.

Despite these risks, analysts remain optimistic about Reddit leveraging its momentum through innovative engagement and advertising strategies.