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Wall Street brokerages start Reddit coverage with skepticism on user growth

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Wall Street brokerages start Reddit coverage with skepticism on user growth
April 15, 2024
Siddarth S - Reuters

By Siddarth S

(Reuters) - J.P.Morgan and Morgan Stanley started coverage on Reddit with equivalent to "hold" ratings, as they wait for clarity on the social media company's user growth, while staying bullish on ad-revenue growth and artificial intelligence (AI) initiatives. Shares of Reddit were up 0.88% at $42.64 in premarket trading.

While Reddit, which made its market debut last month, still relies on advertising for the vast majority of its revenue, it touted AI in its initial public offering (IPO) marketing roadshow as an area of growth.

J.P.Morgan started coverage on Reddit with a "neutral" rating and a $47 price target, while Morgan Stanley initiated with an "equal-weight" rating and a $45 price target.

"DAUq (daily active unique users) growth has accelerated in recent quarters and there is meaningful headroom for growth, but for now Reddit's base of 73 million users is relatively sub-scale," said J.P.Morgan analysts led by Doug Anmuth in a note.

"Valuation leaves us on sidelines as we wait for evidence of outsized user growth and faster execution," said Morgan Stanley.

Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America were among over a dozen underwriters for the IPO, all of whom had to wait till mid April to start coverage as required by industry practice.

With a $50 price target, both Piper Sandler and Roth MKM were the most bullish on the stock with "overweight" and "buy" ratings, respectively.

Piper views Reddit as an "iconic internet asset", while Roth said Reddit, which is regarded as the "front page of the Internet" deserved a premium valuation.

Reddit's share price has already fallen below its debut price of $47. The San Francisco-based firm priced its initial public offering(IPO) at $34, the top of its indicated price range.

Reddit's popularity rose to new heights during the "meme-stock" saga of 2021 in which a group of retail investors collaborated on its forum "wallstreetbets" to buy shares of highly shorted companies like GameStop.

Earlier this month, brokerages Baird and Bernstein had initiated coverage on Reddit.

(Reporting by Siddarth S in Bengaluru; Editing by Vijay Kishore)

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