Despite a Neutral Rating, Reddit Stock Charges Higher

Reddit Inc.'s shares are soaring in Tuesday's trading session, maintaining their steep climb despite a conservative outlook from an analyst regarding the social media company.

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As the morning progresses, shares have surged approximately 12% to reach $66.74. This surge represents a near doubling of their initial public offering price of $34, a remarkable achievement just days following Reddit's entry into the stock market on Thursday.

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The ongoing surge follows the cautious stance taken by New Street Research analyst Dan Salmon on Reddit's stock. Salmon has assigned a neutral rating to the stock, having initially provided coverage with a target price of $54.

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Salmon anticipates heightened volatility leading up to the release of second-quarter earnings, likely scheduled for early August, and three days after when the lockup period expires. In his assessment, he suggests that the potential for a data-licensing deal with OpenAI has already been factored into the stock price, influencing the institutional narrative surrounding Reddit.

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Discussing the emergence of data licensing revenue, Salmon acknowledges the additional upside potential it brings to Reddit. However, he highlights the challenge of accurately gauging the opportunity, tracking progress, and establishing confidence in the company's long-term viability.

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Furthermore, Salmon identifies Reddit's growth in daily active unique users as a key point of contention. He believes that the company can achieve double-digit growth in this metric through 2027, partly driven by advancements in machine learning facilitating user retention. Additionally, Reddit is transitioning to a proprietary mobile-web platform, which Salmon asserts will enhance content optimization for Google search, thereby benefiting the company.

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Salmon also emphasizes the importance of Reddit broadening its advertiser base, noting that the top 10 advertisers accounted for 26% of revenue last year. He anticipates improved diversification through increased penetration of small businesses.

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In summary, while Reddit's stock continues its impressive rally, Salmon's analysis suggests a cautious outlook, emphasizing the need to monitor key factors such as earnings, the expiration of the lockup period, user growth, and the company's efforts to expand its advertiser base.

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