JMP reiterates Market Outperform rating on Reddit stock amid slowing growth

Reddit (RDDT) presents a mixed investment picture, reporting strong 64.12% LTM revenue growth and a 90.82% gross profit margin, yet facing significant deceleration in user engagement, including a 0.3% U.S. time spent growth in June and a 6 million user decline in May. This divergence has led to mixed analyst sentiment, with some firms maintaining positive outlooks based on revenue strength and accelerating website visits, while others have lowered price targets due to user growth concerns, highlighting uncertainty for the stock trading at a 232 P/E. The company's efforts with AI ad tools and potential tailwinds from Google's AI search are key considerations amidst an ongoing content scraping legal dispute.

Analysis

Reddit (RDDT) presents a significant dichotomy between its robust financial execution and deteriorating user engagement metrics, creating a mixed outlook reflected in divergent analyst ratings. The company demonstrates impressive top-line momentum, with revenue growing 64.12% over the last twelve months and maintaining an exceptionally high 90.82% gross profit margin. However, this financial strength is juxtaposed with clear signs of a user growth slowdown. Specifically, U.S. time spent growth decelerated to just 0.3% year-over-year in June, while global in-app time spent growth slowed by 290 basis points. Furthermore, U.S. monthly active users declined year-over-year for a second consecutive month, and total audience reportedly fell by 6 million in May. This situation is compounded by a high valuation, indicated by a P/E ratio of 232. While some analysts see catalysts in accelerating website visits possibly driven by Google's AI search transition and new AI-powered ad tools, others have lowered price targets due to the user growth concerns. The ongoing legal dispute with Anthropic over content scraping also introduces a risk to the platform's core data value proposition.

Key Decisions for Investors

• Investors must weigh the company's impressive 64.12% LTM revenue growth and strong margins against the significant deceleration in core user engagement metrics, which forms the central bull-bear debate for the stock.
• Given the stock's high P/E ratio of 232, positions should be managed with caution, as the valuation is highly sensitive to any further erosion in user growth or a failure to meet aggressive monetization expectations.
• Monitor leading indicators such as monthly website traffic data and the initial performance of new AI-powered ad tools, as these could provide early signals on whether Reddit can offset its user engagement challenges with stronger monetization.
• The wide dispersion in analyst price targets, ranging from $118 to $200, underscores a lack of market consensus, suggesting that investors should be prepared for continued volatility and conduct independent due diligence on the conflicting growth signals.