TLDR
- Reddit stock dropped 7.6% to $233.32 after RBC analyst raised concerns about small business advertising feedback
- RBC’s SMB ad agency checks showed “mixed” results for Reddit, with small brands shifting toward organic presence strategies instead of paid ads
- Meta and Google are seeing stronger ad demand, while Reddit faces tougher competition from established platforms
- Google’s partnership renewal with Reddit won’t happen until 2027, according to RBC
- Despite challenges, analysts maintain a “Moderate Buy” rating with a consensus price target of $238.57
Reddit shares took a hit Thursday, falling 7.6% to $233.32 after RBC analyst Brad Erickson published research highlighting weak feedback from small and medium-sized business advertising checks. The stock traded as low as $240.50 during the session.
Erickson’s report painted a less optimistic picture for Reddit compared to digital advertising giants. While macro conditions look positive for Google parent Alphabet and Meta Platforms, the analyst said Reddit’s outlook was “less positive.”
The feedback from SMB ad agencies revealed pricing challenges for the platform. According to Erickson, Reddit’s relatively low pricing was aligning with conversion levels, suggesting the platform isn’t commanding premium rates.
A concerning trend emerged from the agency checks. Small brands are increasingly building organic presence strategies rather than spending money on advertising. This shift could pressure Reddit’s revenue growth in its advertising business.
Competition From Bigger Players
Reddit faces steep competition from established digital advertising giants. Meta is reportedly experiencing “outsized inflation” in its ad auction system, indicating strong demand for its advertising products.
The contrast is stark. While Meta and Google see robust advertiser interest, Reddit’s position appears weaker. The platform is fighting for ad dollars in a market where bigger competitors have stronger momentum.
Trading volume tells part of the story. Only 733,362 shares changed hands Thursday, down 79% from the average session volume of 3.4 million shares. The company’s stock had closed at $252.38 the previous day.
Erickson noted that Reddit’s numbers could still see upside. However, he cautioned that “much is expected” from the platform, suggesting pressure on management to deliver.
Analyst Views and Recent Performance
Wall Street analysts maintain a mixed outlook. Three analysts rate the stock as Strong Buy, while fifteen have Buy ratings. Twelve analysts assign Hold ratings and one gives a Sell rating.
The consensus price target sits at $238.57, just above current trading levels. Individual targets range widely, from Wells Fargo’s $207 equal weight rating to Needham’s $300 buy rating.
Reddit’s recent earnings showed strength. The company reported earnings per share of $0.80 for the third quarter, beating estimates of $0.50 by $0.30.
Revenue reached $584.91 million, up 67.9% year-over-year and above the $546.65 million consensus estimate. Net margin came in at 18.33% with a return on equity of 14.94%.
Despite the strong quarter, insider selling has been heavy. Company insiders sold 505,470 shares worth approximately $109 million over the last 90 days.
CEO Steve Huffman sold 18,000 shares in mid-November at an average price of $194.81. CTO Christopher Brian Slowe sold 24,000 shares in late November at $192.72 per share.
The company carries a market cap of $43.84 billion. Its PE ratio stands at 133.21 with a P/E/G ratio of 1.74.
Institutional investors have been active. Teacher Retirement System of Texas raised its position by 880.5% during the second quarter, now holding 94,676 shares worth $14.3 million.
Agency responses citing consumer softness dropped compared to October, suggesting an improving macro environment for digital advertising overall. However, Reddit appears to be benefiting less than its larger competitors from this improvement.
Google’s partnership renewal with Reddit won’t occur until 2027, according to Erickson’s research.
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