Analysts at the Bank of America have initiated coverage on the social media platform Reddit with a ‘neutral’ rating and a $46 price target.
The analysts wrote in a note to clients that they see big opportunities for the company, which went public in New York Stock Exchange on March 21 at an IPO price of $34, but that they expect volatility to continue.
They pointed to the company’s potential to convert its 500 million monthly active users to daily active users, monetization of untapped areas including comments, search, and video, and new data deals driving revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) upside.
While a “senior” social company founded in 2005, there are still many growth levers ahead for Reddit, the analysts believe.
“User reach and average revenue per user (ARPU) are below ‘younger’ social comparisons, such as Pinterest and Snap, which provides the opportunity for superior growth,” they wrote.
“Reddit's initiatives to improve content and search relevancy has driven much better revenue/user execution over the last 12 months, and our proprietary user survey suggests there is still room for improvement.”
In terms of risks to the stock, the analysts cited Reddit (NYSE:RDDT)’s dependency on Google, with 25% to 30% of its traffic coming from Google search, its reliance on volunteer moderators, its comparatively newer AdTech capabilities when compared to larger peers, and content risks, noting that Reddit has seen user and advertiser backlash after previous policy changes.
“The company will have to carefully balance the needs of users and moderators with public company requirements and financial targets,” they wrote.
The analysts concluded: “We expect historically volatile user and revenue trends to continue, and with the current macro/rate uncertainly, we prefer larger cap stocks in the sector.”
Shares of Reddit traded hands at about $41 in the early afternoon on Tuesday.