Reddit gains 4% as Jefferies starts at Buy on user growth, monetization room

Reddit stock (NYSE:RDDT) rose 4% early Wednesday, among top gainers in Communication Services stocks, after Jefferies initiated coverage with a Buy rating, noting a “runway for elevated user growth.”

Reddit (RDDT) is set to ride a faster-growing user base and a closing monetization gap with peers to significantly higher earnings, analyst John Colantuoni wrote.

The company 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 2+ years (+51% in 2Q24),” he noted. That’s been helped by deeper integration into Google search after the rollout of a faster Web platform in May 2023.

While Reddit (RDDT) has benefited from an expanded top of funnel, “we estimate logged-in user growth outpaces total user growth beginning in ’25,” Colantuoni said.

Meanwhile, U.S. average revenue per user has lagged about 75% below that of rival Pinterest (PINS) and about 45% below that of Snap (SNAP), pointing to a “long runway for increased monetization” — which Reddit can help tap with more innovation, higher ad loads and incremental partnerships.

And there’s an “attractive call option” in potential artificial intelligence-based data licensing deals, offering additional high-margin revenue streams and upside to consensus, he said.

He sees three-year compound growth of 50% in EBITDA, the highest in Jefferies’ coverage, and offering 7% upside to 2025 consensus and 12% upside to 2026 consensus.

The firm set a $90 price target, implying 22% upside.