Investing.com -- Redburn Atlantic has begun coverage on Reddit Inc (NYSE:RDDT) stock with a Sell rating, setting a price target of $75 per share, which implies roughly 40% downside from the last closing price.
The equity research firm argues that Reddit’s growth story is heavily reliant on Google Search, which has boosted user numbers but remains a temporary tailwind rather than a structural advantage.
“While Reddit’s financial performance has been stellar since its IPO in March 2024, consensus expectations fail to appreciate the vulnerability of Reddit’s growth to Google Search and the structural challenges of Reddit’s nascent advertising proposition,” the Redburn analysts wrote.
They believe the stock is trading at an unjustified premium to its peers and see “material downside” to consensus estimates.
User growth has been driven largely by logged-out users accessing the platform via Google Search, a trend that has significantly inflated Reddit’s traffic. But analysts warn that this surge is “much more transitory than commonly perceived” and expect logged-out user growth to slow as Google refines its search algorithm.
Meanwhile, logged-in user growth, which is more valuable for monetization, has remained largely unchanged.
On the advertising front, Redburn notes that while Reddit has seen near-term revenue gains, its long-term monetization potential remains uncertain.
The firm argues that the platform’s predominantly text-based format presents challenges similar to those faced by Twitter (now X), which has historically struggled to effectively scale its ad business.
“Reddit is in the process of attempting to build out better direct response ad-targeting capabilities, but beyond Alphabet (NASDAQ:GOOGL) and Meta (NASDAQ:META), few companies have managed to do this without stumbling at least a couple of times,” the analysts said.
They add that Reddit may require years of investment to achieve sustainable advertising growth.
Valuation is another key concern. According to Redburn’s projections, Reddit is valued at 22x its expected enterprise value (EV) to adjusted EBITDA multiple for fiscal year 2027 (FY27), or approximately 54x when factoring in stock-based compensation (SBC).
In contrast, Pinterest (NYSE:PINS), which the firm rates as a Buy, trades at just 10x FY27 EV/adjusted EBITDA, or 19x post-SBC.
“We see significant risk to the downside, with Pinterest’s and Snap’s post-COVID collapse instructive in illustrating the dangers,” the analysts noted.