Loop Capital lowers Reddit stock price target on user growth concerns

Loop Capital lowered its price target on Reddit to $200 from $210, maintaining a Buy rating despite moderating user growth in Q2 and an InvestingPro analysis indicating overvaluation; however, Loop Capital projects 80% two-year stacked growth and increased its 2025 and future-year forecasts, anticipating strong EBITDA performance. Other firms offer mixed views: RBC Capital initiated coverage with a Sector Perform rating and a $125 price target, while Cannonball Research maintained a Buy rating with a $244 target, citing confidence in Reddit's monetization strategy. Reddit also faces challenges, including a lawsuit against Anthropic for unauthorized data use and the departure of its Chief Product Officer.

Analysis

Reddit (RDDT) presents a complex investment case, with Loop Capital lowering its price target to $200 from $210 while retaining a Buy rating. This adjustment reflects moderating year-over-year user growth expected in the second quarter due to challenging comparisons, even as the firm projects an impressive 80% two-year stacked growth and anticipates EBITDA will again exceed the high end of guidance. Reddit demonstrates strong fundamentals with gross profit margins of 90.82% and substantial revenue growth of 64.12% over the last twelve months. However, InvestingPro's Fair Value analysis indicates the stock, currently trading at $115.1, appears overvalued. Further complicating the outlook, Piper Sandler noted a slowdown in user growth for the third consecutive month, with a 6 million user decrease in May, and the company faces a leadership transition with the departure of its Chief Product Officer. Reddit has also initiated a lawsuit against Anthropic for alleged unauthorized content scraping. Despite these headwinds, Loop Capital maintains a positive long-term view, forecasting a potential user base expansion to 200 million daily active users by 2029, potentially generating $4.5 billion in revenue under a base case scenario. Cannonball Research shares this optimism, maintaining a Buy rating with a $244 target, citing confidence in Reddit’s long-term monetization strategy and its new Dynamic Product Ads feature. Conversely, RBC Capital initiated coverage with a more cautious Sector Perform rating and a $125 price target, acknowledging revenue growth potential but also highlighting risks associated with traffic sources. The broader digital advertising market shows signs of strengthening, with a projected 6.3% year-over-year growth for Q2 2025, which could support Reddit's ongoing efforts to diversify traffic and enhance ad spending effectiveness.

Key Decisions for Investors

• Investors should carefully balance Reddit's strong historical revenue growth and high gross margins against the current valuation concerns, moderating user growth figures, and recent executive changes.
• Monitor key performance indicators closely, including daily active user trends, the market reception and revenue impact of new features like Dynamic Product Ads, and any significant developments in the ongoing litigation with Anthropic.
• Given the divergent analyst ratings and price targets, from Loop Capital's revised $200 to RBC's $125, a thorough assessment of risk tolerance is warranted, potentially deferring significant position changes until more consistent user growth and monetization traction are demonstrated.