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.
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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.
