On Monday, Morgan Stanley (NYSE:MS) made a significant adjustment to its stance on Reddit (NYSE: RDDT), upgrading the social media company's stock from Equalweight to Overweight.
Accompanying this upgrade, the firm also set a new price target of $200, a substantial increase from the previous target of $70. The stock, currently trading at $162.76, has shown remarkable momentum with a 223% gain year-to-date, according to InvestingPro data.
The analyst at Morgan Stanley expressed optimism about Reddit's growth trajectory, highlighting the platform's strong user engagement, effective monetization strategies, and potential for EBITDA expansion. The firm acknowledged that it had previously underestimated Reddit's performance but now anticipates robust growth in the coming years.
InvestingPro data supports this outlook, revealing impressive gross profit margins of 89.25% and strong revenue growth of 48.7% in the last twelve months.
Morgan Stanley forecasts a 35% growth in U.S. advertising revenue for Reddit between 2024 and 2027, which is estimated to be two to six times faster than that of Reddit's peers. This growth is expected to be driven by an increase in user numbers, more time spent by users on the platform, higher ad pricing, and the possibility of increasing the ad load.
Despite the anticipated investments, Morgan Stanley predicts that Reddit will maintain leading incremental margins among its peers. This is projected to result in approximately $1 billion and $1.4 billion of EBITDA for the years 2026 and 2027, respectively.
The new price target of $200 suggests a 23% upside potential and is based on approximately 36 times the enterprise value to EBITDA for the year 2026. This valuation aligns Reddit with its industry peers when considering EBITDA growth. Additionally, the firm outlined a bull case with a potential price target of $300 and a bear case at $105, presenting a 2:1 ratio of bull to bear scenarios.
In other recent news, Reddit has been making significant strides in both its financial performance and growth trajectory. The social media platform has reported considerable growth in user numbers, revenue, and profits, surpassing expectations in both the June and September quarters.
Reddit achieved a 56% increase in advertising revenue and a 68% rise in total revenue in the last quarter. Analyst firms including Loop Capital, Piper Sandler, Citi, B.Riley, and JMP Securities have upgraded their price targets for Reddit, acknowledging the company's strong performance.
Loop Capital raised its price target on Reddit shares to $180, up from the previous $120, maintaining a Buy rating. Piper Sandler adjusted its outlook on Reddit, increasing the price target to $150 from the previous $115 while maintaining an Overweight rating on the shares. Citi maintained a Buy rating on Reddit and a $120.00 price target. B.Riley maintained a Buy rating on Reddit and increased the price target to $112 from $87.
These recent developments underscore the positive outlook for Reddit's continued growth and financial success. The company's strategic initiatives, such as the development of Reddit's advertising stack and user tools, are expected to further monetize the platform's user engagement and content.
However, Reddit recently encountered a major outage affecting thousands of users, following a software bug fix. The company has not yet released a statement regarding the cause of the outage or the measures being taken to resolve the issue.
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