Reddit (NYSE: RDDT) has the odds stacked against it, according to Bernstein analyst Mark Shmulik, who initiated coverage of the social media company this past week. He assigned the stock an “underperform” rating and attached a price target of $40. Based on the stock price as of this writing, that price target implies potential downside of about 16%.
Empty promises
The analyst’s main contention is that the promises Reddit made in the lead-up to its IPO are unlikely to bear out. The company’s strategy is to grow its user base, boost engagement with better tools for users, and increase its appeal to advertisers with various improvements to its platform.
Shmulik points out that similar strategies were put in place at other social media companies that have struggled since going public, like Pinterest and Snap. Since peaking during the pandemic, Pinterest stock is down 62%, and Snap stock is down 87%.
Other issues raised at Bernstein are Reddit’s anonymous user base, which might be tricky to monetize, and the platform’s adult content, which could drive advertisers away.
Is Reddit stock a buy or sell?
Reddit is valued at about $7.6 billion. That’s a lofty valuation for a company that still must prove it can grow revenue and profits as a public company in an industry where so many players have struggled to so.
The company generated revenue of $804 million in 2023, along with a net loss of $91 million and negative free cash flow of $85 million. The market has awarded Reddit a premium valuation, though, with a price-to-sales ratio of nearly 10. Meanwhile, Pinterest currently trades for less than 8 times sales, and Snap trades for less than 4 times sales.
If Shmulik is right about Reddit’s challenges, the stock could tumble far below his $40 price target as investors reassess the company’s prospects. Until Reddit proves itself, it looks like a good idea to stay away from the stock.
Should you invest $1,000 in Reddit right now?
Before you buy stock in Reddit, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Reddit wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 4, 2024
Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pinterest. The Motley Fool has a disclosure policy.
Reddit Stock Has 16% Downside, According to 1 Wall Street Analyst was originally published by The Motley Fool