On Wednesday, BofA Securities updated its outlook on Reddit (NYSE: RDDT), raising the price target from $84.00 to $99.00 while maintaining a Neutral rating on the shares.
The adjustment follows Reddit's third-quarter earnings, which surpassed analyst expectations, with revenue and EBITDA reaching $348 million and $94 million, respectively. This performance exceeded the Street's projections of $310 million in revenue and $58 million in EBITDA.
The company's advertising revenue was a significant contributor to the strong quarter, coming in at $315 million, which was above the Street's estimate of $275 million. However, data revenue slightly missed expectations, reporting $33 million against an estimated $36 million.
Reddit's advertising growth has been attributed to an increase in user engagement and the introduction of conversation placement ads, which have expanded the company's advertising capabilities.
Reddit also demonstrated efficiency in its operations, as the improved margins were partly due to a modest 7% increase in headcount. This was balanced against a slight uptick in the cost of goods sold (COGS), with the cost per user rising by 10% quarter over quarter.
The platform's daily active users (DAUs) for the third quarter were reported at 97.2 million, an increase of 6 million from the previous quarter and higher than the Street's expectation of 96.9 million.
Looking ahead to the fourth quarter, Reddit's guidance suggests continued strength. The company forecasts revenues between $385 million and $400 million, representing a year-over-year growth of 54-60%. Additionally, EBITDA is projected to be between $110 million and $125 million, significantly above the Street's estimates of $353 million in revenue and $84 million in EBITDA.
This positive guidance indicates that Reddit is poised to maintain its growth trajectory as it closes out the year.
In other recent news, Reddit has seen a series of significant financial growth and strategic developments. The company's Q2 revenue surged by 54%, reaching $281.2 million, surpassing analyst expectations. Additionally, the net loss decreased to $10.1 million from $41.1 million a year ago, and the adjusted EBITDA turned positive at $39.5 million.
Multiple analyst firms including Loop Capital, B.Riley, Deutsche Bank, and Jefferies have increased their price targets for Reddit, citing factors such as user growth and robust advertising sentiment. Notably, Jefferies anticipates Reddit's EBITDA to double in the next two years, primarily driven by user growth.
Reddit's recent decision to expand its AI-powered machine translation services to 35 additional countries has also been well received, prompting several firms to reiterate their Buy ratings on Reddit shares. These are recent developments, and their long-term impact remains to be seen.
InvestingPro Insights
Reddit's impressive third-quarter performance and optimistic fourth-quarter guidance are further supported by recent InvestingPro data and tips. The company's revenue growth remains strong, with a 36.55% increase over the last twelve months and a notable 53.63% quarterly growth in Q2 2024. This aligns with the InvestingPro Tip that analysts anticipate sales growth in the current year.
The platform's high gross profit margin of 88.54% underscores its efficiency in monetizing user engagement, which is reflected in the InvestingPro Tip highlighting Reddit's "impressive gross profit margins." This efficiency is crucial as Reddit continues to expand its advertising capabilities and user base.
Despite not being profitable over the last twelve months, InvestingPro Tips suggest that analysts predict the company will be profitable this year, which is consistent with the positive EBITDA guidance provided by Reddit for Q4. The stock's strong performance is evident in its 62.05% return over the past year and its current trading near its 52-week high, with the price at 98.51% of its peak.
For investors seeking a more comprehensive analysis, InvestingPro offers 16 additional tips for Reddit, providing a deeper understanding of the company's financial health and market position.
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