US brokerages share cautious outlook for Reddit amid monetisation challenges

Brokerage firms on Reddit: Two US brokerages have initiated coverage of Reddit with a cautious outlook, expressing scepticism about the social media platform's path to profitability and raising concerns regarding its potential inclusion in the 'meme stock' category.

Reddit, established in 2005, has yet to report an annual profit, and its shares have dipped below the debut price of $47, settling at $45.88 as of the latest update. Despite an initial public offering (IPO) price of $34 last month, the stock continues to face downward pressure.

Bernstein and Baird issued their inaugural ratings on Wednesday, while major Wall Street banks such as Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America, serving as underwriters for Reddit's IPO, will release their assessments in mid-April.

Bernstein started coverage with an 'underperform' rating and set a price target of $40, citing concerns over Reddit's engagement levels, user anonymity, and Not Safe for Work (NSFW) content. They questioned Reddit's prospects compared to platforms like Pinterest and Snapchat, which have struggled to fulfil their potential despite higher engagement and better ad tools.

On the other hand, Baird adopted a more optimistic stance, assigning a 'neutral' rating and a price target of $50. They highlighted Reddit's robust user base and potential for margin growth.

Reddit gained traction during the 2021 'meme-stock' phenomenon, particularly through its "wallstreetbets" forum, where retail investors coordinated purchases of heavily shorted stocks like GameStop (GME.N).

As part of its strategy to incentivise users, Reddit reserved 8 per cent of its shares for eligible users, moderators, select board members, as well as friends and family of employees and directors. Bernstein analysts described Reddit as an "institutional meme stock," cautioning against overly optimistic long-term projections and highlighting the need for sustainable profitability and non-advertising revenue streams.

(With Reuters inputs)