Two major U.S. brokerages, Bernstein and Baird, have initiated coverage of Reddit (RDDT.N) with a skeptical stance on the social media platform’s ability to turn profitable and raised concerns over its potential entry into the ‘meme stock’ realm.
Lack of Profits a Concern
Reddit has not posted an annual profit since its launch in 2005, and its shares have now fallen below its debut price of $47. Bernstein analysts led by Mark Shmulik issued an ‘underperform’ rating and a price target of $40, questioning Reddit’s monetization capabilities.
‘Meme Stock’ Risks Highlighted
Bernstein analysts also expressed apprehensions about Reddit becoming an “institutional meme stock.” The platform’s popularity surged during the “meme-stock” saga of 2021, when retail investors on the “wallstreetbets” forum coordinated to buy shares of heavily shorted companies like GameStop.
User Incentives Raise Eyebrows
As part of its plan to reward users, Reddit had reserved 8% of the shares on offer for eligible users and moderators, certain board members, and friends and family members of employees and directors. Bernstein analysts labeled this move an “institutional meme stock,” casting doubt on Reddit’s long-term promises of growing the ad base and achieving profitability.
Cautious Optimism from Baird
Brokerage Baird took a more optimistic stance, initiating coverage with a ‘neutral’ rating and a price target of $50, citing Reddit’s healthy user base and potential for margin growth. However, their rating still reflects caution toward the company’s prospects.
Underwriter Ratings Awaited
Major Wall Street banks that served as underwriters for Reddit’s initial public offering (IPO), including Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America, will have to wait until mid-April to issue their ratings due to regulatory restrictions.
As Reddit navigates the public market, these initial brokerage ratings underscore concerns about the company’s path to profitability and its potential to become a ‘meme stock,’ casting doubts on its long-term viability and ability to monetize effectively.
