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Investing.com -- Bank of America analysts believe there is “a big opportunity” for Reddit Inc (NYSE:RDDT) ahead, highlighting positive takeaways from their recent meetings with the social media company’s management and Bay Area investors.
The analysts noted that the rollout of Reddit’s new search format, Answers, was a key area of investor focus, alongside questions about the sales organization, Google (NASDAQ:GOOGL) partnership, user growth potential, ad product pipeline, and video platform.
“While no update on company outlook or (1Q Google traffic trends) was provided, we thought messaging on opportunity was upbeat with management reiterating how early the platform was in its content and ad platform build out,” analysts led by Justin Post said in a note.
Answers, a search tool powered by generative AI, is in its early stages but is considered a major step in improving the search experience. Although still under testing, management believes it could engage more users and serve as a third monetization stream alongside ads and data licensing.
With a current count of 380 million weekly users, including 170 million in the U.S. alone, Reddit sees a substantial opportunity to convert a larger portion of these visitors into daily active users (DAUs), which currently stand at around 50 million.
The company aims to reduce joining friction and utilize machine learning to make the platform’s content more relevant, thereby increasing user engagement. Data indicates that user engagement time can grow from 20 to 50 minutes as users become more familiar with Reddit.
On the advertising front, Reddit has several initiatives underway to bolster revenue growth. These include using larger models and more data signals to improve ad relevance, introducing new ad formats that align with the platform’s aesthetic, and automating creative to enhance advertising outcomes.
The company is also working on an automated advertising stack and dynamic product optimization, believing that automation “is a key unlock for smaller advertisers,” analysts highlighted.
Overall, with half the ad loads of other platforms, an early-stage international content rollout and roughly 1.2 billion unmonetized searches per month, analysts anticipate “outsized revenue growth for Reddit for several years.”
However, they maintained a Neutral rating on the stock, noting that its current valuation at a significant premium—13 times its projected 2026 sales—could pose a risk of valuation compression in the face of macroeconomic revenue pressures.