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On Monday, Wells Fargo (NYSE:WFC) analyst Ken Gawrelski downgraded Reddit stock (NYSE:RDDT) from Overweight to Equal Weight and reduced its price target to $115 from $168. The stock, currently trading at $113.23, has seen a significant 30.7% decline year-to-date, though it remains up 82.5% from its IPO price. According to InvestingPro analysis, Reddit is currently trading near its Fair Value, with analyst targets ranging from $75 to $220. The adjustment was made amidst concerns that issues with Reddit’s user base may become more permanent, particularly as Google (NASDAQ:GOOGL) intensifies the use of AI in its search features. This anticipated change is expected to affect Reddit’s stock multiple due to user disruption, which could lead to subsequent financial impacts.
Gawrelski predicts advertising revenues and EBITDA for 2026 and 2027 to fall below consensus by 6% and 14%, and 2% and 15%, respectively. While Reddit boasts impressive gross profit margins of 90.8% and strong revenue growth of 64.1% in the last twelve months, the forecast includes a potential decline in logged-in user growth, which could impact the high-margin data licensing revenue as Reddit prioritizes community health over licensing revenues. InvestingPro subscribers can access 18 additional key insights about Reddit’s financial performance and valuation metrics. Logged-out users, who make up 55% of the total user base and contribute to the scale of ad reach, are seen as crucial despite only generating approximately 15% of advertising revenues.
The disparity in monetization between logged-in and logged-out users is attributed to differences in time spent on the platform and user behavior patterns. Logged-out users spend about 20% of the time compared to logged-in users and are concentrated in comment pages with low ad load. However, they are considered a key acquisition pool for converting to logged-in users. Due to the changes, the three-year compound annual growth rate (CAGR) for daily active users (DAU) has been reduced to 10% from the previous 13%.
The analyst believes that Reddit’s stock is unlikely to meet market expectations for advertising growth based solely on logged-in users. A comparison with market leader META (NASDAQ:META) indicates that achieving a 25% three-year revenue CAGR, which is necessary for a 15% annual return, would be unrealistic. This would require Reddit’s logged-in users to monetize at approximately 75% of META’s rate by 2028.
Gawrelski also points out the increasing risk of disintermediation due to the rise of AI-powered search tools that provide direct answers using Reddit’s data. He suggests that Reddit should focus on internal monetization of its content and data to minimize long-term risks to community growth, even if this means foregoing a high-margin revenue stream from data licensing, which has been estimated at around $150 million.
The revised estimates include a cut in the DAU forecast for 2025 and 2026 by 2% and 12% to 110 million and 115 million, respectively, due to the accelerated change in search user behavior. The analyst has also reduced the projected ad revenue for 2026 and 2027 by 6% and 14%, with the EBITDA for those years lowered to $900 million and $1.1 billion, respectively. Despite these concerns, InvestingPro data shows Reddit maintains a "GOOD" overall financial health score of 2.84, with particularly strong cash flow metrics. The price target has been adjusted to $115, based on a 20 times multiple of the projected 2027 EBITDA, down from the prior multiple of 22.5 times. For detailed analysis of Reddit’s valuation and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.
In other recent news, Reddit has released its first-quarter earnings report, revealing robust revenue growth and a significant increase in advertising revenue. The platform’s ad revenue surged 61% year-over-year, with a notable rise in daily active users, adding 6.4 million in the first quarter. Following these results, several analysts have adjusted their price targets for Reddit. Seaport Global Securities upgraded Reddit to a Buy rating with a price target of $165, citing the company’s strong revenue growth and potential for monetization. Citizens JMP also raised its price target to $180, maintaining a Market Outperform rating, while highlighting Reddit’s advertising platform improvements.
JPMorgan increased its target to $145, maintaining a Neutral rating, and noted the company’s resilience against macroeconomic pressures. Goldman Sachs, while raising its target to $140, also maintained a Neutral rating, emphasizing the company’s strong operating leverage and strategic developments in AI and advertising. Citi analysts raised their target to $158, reaffirming a Buy rating and praising Reddit’s increased user engagement and introduction of new features. Despite some concerns about user growth slowing due to changes in Google’s algorithm, analysts remain optimistic about Reddit’s revenue prospects and future growth initiatives.
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