Shares of Reddit (RDDT 1.87%) have plunged from the peak they touched soon after the social media company went public in March. While an initial surge sent Reddit stock to nearly $75 per share, it's been downhill ever since. The stock has tumbled more than 40% from that all-time high.
Analysts at Loop Capital are optimistic that a rebound is coming. The investment bank initiated coverage of Reddit stock on Monday, giving it a "buy" rating and a $55 price target. While that price target is well below where the stock traded in March, it still represents upside of about 30% from the current price.
A favorable financial model
Social media can be a great business. Content comes from users, capital spending is often minuscule, and gross margins can be through the roof as ad spending rolls in. This is the general thesis behind Loop Capital's optimistic outlook.
In particular, Loop Capital expects Reddit to continue to grow at a faster rate than its social media peers in terms of both user base and revenue. The company grew revenue by 21% to $804 million in 2023, and ended the year with 73.1 million daily active users.
The investment bank also expects Reddit to generate gross margins of somewhere around 85% while spending very little on capital expenses thanks to its asset-light business model. While Reddit produced a free cash flow loss in 2023, its numbers are trending in the right direction.
Is Reddit stock a buy?
While Reddit may be able to consistently grow its revenues by 20% annually, given that it can monetize its platform by selling advertising and through the licensing of data for training AI models, the fact of the matter is that the company is nowhere near profitable at the moment. It posted a net loss of $91 million in 2023, and a free-cash-flow loss of $75 million. Given that the stock trades at a price-to-sales ratio above 8, investors should tread carefully.
