Reddit set to harness 'treasure trove' of user-generated content, says analyst

By James Rogers

Reddit has 'multiple growth vectors,' according to Baird Equity Research analyst Colin Sebastian

Reddit Inc., which reported its second quarterly results as a public company Tuesday, is well-positioned to reap the benefits of the "treasure trove" of user-generated content on the platform, says Baird Equity Research.

"We are incrementally positive on RDDT after the company reported another quarter with strong revenue growth and profit margins above expectations, benefiting from accelerating user growth and user engagement, ramping SMB and mid-market advertising, improving ad tech, and operating leverage," wrote Baird analyst Colin Sebastian, in a note released Wednesday. "Near term, Q3 guidance reflects slowing advertising growth, embedding a degree of conservatism amid mixed industry trends."

"But looking further ahead, we note Reddit has multiple growth vectors leveraging a treasure trove of user-generated content and quasi-search engine capabilities," Sebastian added. "Moreover, after the pullback, valuation appears more reasonable." Baird maintained its neutral rating and $59 price target for Reddit.

Related: Reddit reports second-quarter revenue beat and narrower-than-expected loss

Reddit shares (RDDT) were down about 7% on Wednesday, putting the stock on pace for its biggest decline since July 24, when it fell 7.2%. The stock is up 0.3% since Reddit's IPO on March 21.

The social-media platform reported better-than-expected revenue and a narrower-than-expected loss in in its second-quarter results after the market closed Tuesday, and also gave sales guidance that surpassed Wall Street's expectations.

Speaking during the conference call to discuss Reddit's second-quarter results, CEO Steve Huffman explained that immersive machine translation is now widely available in French on the platform. "As a result, France was one of our fastest-growing countries, surpassing growth in the U.S.," he said. "We will now begin to expand machine translation to German, Spanish and Portuguese, aiming to make Reddit accessible to everyone, regardless of their native language."

Related: Reddit's stock rallies ahead of second-quarter results

In a note released Wednesday, Raymond James analyst Josh Beck pointed to Reddit's existing deals with Alphabet Inc.'s (GOOG) (GOOGL) Google and with OpenAI, which brings the platform's content to ChatGPT. Beck thinks that more big-name partnerships could follow, potentially involving Microsoft Corp.'s (MSFT) Bing and Facebook owner Meta Platforms Inc. (META). "With Google/OpenAI signed, we expect others like Bing, Anthropic, Meta, Perplexity to possibly follow," he wrote. Raymond James maintained its strong buy rating and $70 price target for Reddit.

Of 15 analysts surveyed by FactSet, eight have a buy rating, six have a hold rating, and one has an underweight rating for Reddit.

Last month, Reddit announced a partnership program with five major U.S. sports organizations. The deals with the NFL, NBA, MLB, PGA Tour and NASCAR mean Reddit users will get access to video highlights from games and tournaments, AMA sessions with players, and behind-the-scenes videos.

Related: Reddit shares soar on revenue beat, narrower-than-expected loss in first post-IPO results

"What the partnerships do is allow us to get access to special content for our fan communities," Reddit COO Jen Wong told MarketWatch on Tuesday. "That also opens an opportunity for advertisers because they can participate alongside that content, a lot of it is video."

"There are so many more sports globally where we can extend partnerships, so we do think about this as a program that can be global," she added, and noted that fandom on Reddit is not limited to sports. "It's early - we're testing new ways to really engage our fan communities through special content. We'll see how the program unfolds."

-James Rogers

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08-07-24 1521ET

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