Reddit (NYSE: RDDT) stock fell over 2% in the regular trading session on Monday after Redburn Atlantic initiated coverage of the social media company with a “Sell” rating, citing “material downside” risk.
The equity research firm set a price target of $75 per share for Reddit, suggesting a potential decline of approximately 40% from the stock’s last closing price. Redburn analysts argue that the stock’s premium valuation is not supported by its fundamentals.
One major concern flagged by analysts is Reddit’s reliance on Google Search. The platform’s user growth has surged, primarily due to logged-out users finding Reddit through Google. However, Redburn views this as a short-term boost rather than a lasting strength.
“Reddit’s financials have impressed since its March 2024 IPO,” the analysts wrote. “But consensus estimates overlook how vulnerable its growth is to changes in Google Search and the structural challenges of its nascent advertising business.”
The firm pointed out that logged-in user growth, which matters more for revenue, has remained flat. Meanwhile, the analysts cautioned that the spike in logged-out users could fade as Google tweaks its search algorithm.
On the advertising front, Reddit (NYSE: RDDT) has seen solid near-term revenue growth. However, Redburn expressed skepticism about its ability to sustain this momentum, arguing that the platform’s predominantly text-based format presents challenges similar to those that Twitter (now X) faced in scaling its advertising business.
“Reddit is working to build better direct response ad-targeting capabilities,” the analysts said. “But beyond Alphabet (NASDAQ: GOOGL) and Meta (NASDAQ: META), few companies have managed to do this without stumbling at least a couple of times.”
They also noted that achieving sustainable advertising growth could require years of significant investment from Reddit.
Valuation concerns also loom large. Redburn Atlantic projects Reddit is trading at 22x its expected enterprise value (EV) to adjusted EBITDA multiple for fiscal year 2027 (FY27). When factoring in stock-based compensation, that multiple rises to approximately 54x.
For comparison, Pinterest (NYSE: PINS), which the firm rates as a “Buy,” trades at a much lower 10x FY27 EV/adjusted EBITDA multiple, or 19x when including stock-based compensation. This gap underscores Redburn’s view that Reddit (NYSE: RDDT) is overpriced relative to its peers.
“We see significant risk to the downside,” the analysts concluded. They pointed to the sharp post-COVID declines of Pinterest and Snap (NYSE: SNAP) as examples of what could happen if Reddit’s valuation corrects.
