On Monday, Deutsche Bank (ETR:DBKGn) initiated coverage on Reddit , Inc. (NYSE: NYSE:RDDT) stock, assigning a Buy rating and setting a price target of $50.00. The financial institution outlined several growth prospects for the social media platform, including an acceleration in user growth, potential advancements in advertising technology, and early-stage developments in its data licensing business.
The bank's analysis suggests that Reddit is experiencing a surge in user engagement and is in the initial phases of enhancing its advertising platform to better serve more specific marketing objectives. Additionally, after a period of significant staff expansion, the company is now entering a phase where it is expected to reap the benefits of its investments in human resources.
Deutsche Bank forecasts a compound annual growth rate (CAGR) of 14% in daily active users (DAUs) from FY23 to FY26, with the potential to reach up to 19%. Revenue growth is also expected to be robust, with a projected 24% CAGR, although the firm sees possibilities for Reddit to surpass this estimate significantly. In an optimistic scenario, revenue could potentially climb at a CAGR of 42% from FY23 to FY25.
The bank's projections include a substantial increase in Reddit's adjusted EBITDA margin, anticipating an expansion of 17 percentage points over the same period. Under more favorable conditions, this expansion could extend to 27 percentage points within the next two years. Deutsche Bank also points to the potential for Reddit to diversify its business model through its developer platform, which could lead to the creation of online marketplaces or gaming platforms.
Regarding Reddit's valuation, the analysis indicates that the company's current trading levels are below the average of its peers when measured by enterprise value to sales and enterprise value to gross profit metrics. The $50 price target is based on an 8x FY25 enterprise value to gross profit multiple, which remains below the peer group average.
InvestingPro Insights
As Reddit, Inc. (NYSE: RDDT) captures the attention of investors and analysts alike, real-time data and insights from InvestingPro offer additional context for Deutsche Bank's optimistic coverage. With a notable gross profit margin of 86.19% in the last twelve months as of Q1 2023, Reddit's ability to convert revenue into gross profit stands out, aligning with Deutsche Bank's positive outlook on the company's advertising platform advancements and user engagement growth.
Despite not being profitable over the last twelve months, analysts on InvestingPro predict that Reddit will turn a profit this year, which could be a pivotal moment for the company. This projection is particularly relevant considering Reddit's current market capitalization of $6.86 billion and its trading near its 52-week low, which might present a buying opportunity for investors who believe in the company's profitability trajectory.
InvestingPro Tips highlight that Reddit holds more cash than debt on its balance sheet and that its liquid assets exceed short-term obligations, suggesting a solid financial position that could support its ambitious growth plans. For readers looking to delve deeper into Reddit's financial health and future prospects, InvestingPro offers additional insights. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and explore the full range of 8 additional InvestingPro Tips available for Reddit.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.