Reddit stock charges higher, even as it picks up a neutral rating

By Emily Bary and James Rogers

Shares trading at roughly double their IPO price

Reddit Inc.'s stock is continuing its sharp ascent in Tuesday trading, even as an analyst took a sidelined stance on the social-media name.

Shares are up more than 16% in midday trading to $69.40. They're now changing hands at more than double their $34 initial-public-offering price, just days after Reddit's (RDDT) Thursday stock-market debut.

The shares are attracting more attention from investors Tuesday, according to stock-market-focused social-media platform Stocktwits. Tom Bruni, the platform's head of market research, said message volume was ticking up, and more people are adding the ticker to their watchlists.

The stock is the second-most newly followed one on Stocktwits today, he said in emailed comments.

Read: How the AI potential of Reddit's user data has helped send its stock soaring

However, Bruni said that the increased interest in Reddit is not equating to positive sentiment toward the stock, at least in terms of user conversations. "Sentiment is stuck in neutral territory as people continue to debate the short-term momentum vs. the business' long-term prospects," he added. "Meanwhile, Wall Street is finally starting to cover the stock, which is creating more attention/debate around the stock."

With the stock attracting more attention, the hurdles the company faces are also being thrust into the spotlight, which could explain the neutral sentiment. Potential tension between Reddit's loyal user base and the demands it will face as a public company, for example, has been cited as a big challenge for the social media platform.

Set against this backdrop, Stocktwits says user sentiment has fluctuated around Reddit, even amid all the brouhaha over its closely-watched offering. The company saw sentiment in "extremely bearish" territory prior to the IPO, which continued into its second day of trading Friday. Sentiment finally ticked into bullish territory for the first time Monday, according to Stocktwits.

The continued rally comes after New Street Research analyst Dan Salmon set a neutral rating on Reddit's stock. He previously launched coverage of the stock with a $54 target price.

"We expect volatility through the release of second quarter earnings (likely early August) and three days after when the lockup expires," Salmon wrote.

See also: Reddit's CEO gets $900 million richer from stock's pop. Here's who else made bank.

Over the near-term and mid-term, he expects the "institutional narrative" around Reddit to reflect that the potential for an OpenAI data-licensing deal is already baked into the stock price.

"The emergence of data licensing revenue brings still more upside potential to RDDT," he wrote "The challenge is sizing the opportunity, gauging progress and gaining conviction in long-term viability."

Additionally, he called Reddit's growth in daily active unique users the "fundamental controversy" around the stock. Salmon thinks the company can drive double-digit growth on the metric through 2027, in part as machine learning helps spur retention. The company is also transitioning to a proprietary mobile-web platform that he says will deliver benefits in terms of optimizing Reddit content for Google search.

Related: Reddit's debut made a splash, but caution's still the name of the game in the IPO market

He'll also be watching to see how the company broadens its base of advertisers, as Reddit's top 10 advertisers accounted for 26% of revenue last year.

"We expect [small-business] penetration to improve diversification," he wrote.

-Emily Bary -James Rogers

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-26-24 1314ET

Copyright (c) 2024 Dow Jones & Company, Inc.