U.S. brokerages start Reddit coverage with doubts over turning a profit

FILE PHOTO: Illustration shows Reddit logo

(Reuters) - Two U.S. brokerages began coverage of Reddit by taking a skeptical stance on the social media platform's ability to turn profitable and raised concerns over its potential entry into the 'meme stock' club.

Reddit has not posted an annual profit since its launch in 2005 and its shares have now fallen below its debut price of $47. Its initial public offering last month was priced at $34.

The stock was last down 2.3% at $45.88.

Bernstein and Baird issued their first ratings on the stock on Wednesday, while Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America will have to wait until mid-April as the Wall Street banks were underwriters for Reddit's IPO.

Bernstein started coverage with an 'underperform' rating and a price target of $40, even as it acknowledged a "compelling" near-term potential.

"If Pinterest and Snapchat continue to struggle to live up to their potential with higher engagement/commercial intent, better ad tools...what hope does Reddit have with their worst-in-class engagement, anonymous user base, and NSFW (Not Safe for Work) content?" Bernstein analysts led by Mark Shmulik asked in a note.

Brokerage Baird was more ambitious as it started coverage with a 'neutral' rating and a price target of $50, citing a healthy user base and potential for margin growth.

Reddit's popularity rose to new heights during the "meme-stock" saga of 2021 in which a group of retail investors collaborated on its forum "wallstreetbets" to buy shares of highly shorted companies such as GameStop.

As part of its plan to reward users, Reddit had reserved 8% of the shares on offer for eligible users and moderators, certain board members, as well as friends and family members of employees and directors.

Bernstein analysts called it an "institutional meme stock".

"The longer term promises — grow the ad base, profits just around the corner and the dream of all the non-ad upside — are promises we've heard too many times," they said.

(Reporting by Siddarth S in Bengaluru, additional reporting by Lance Tupper in New York; Editing by Arun Koyyur)