Reddit (RDDT) shares moved higher in premarket trading on Wednesday after KeyBanc Capital Markets began coverage of the social media platform with an Overweight rating and a $225 price target, implying roughly 26% upside from Tuesday's close. The positive analyst note comes just ahead of the company's second-quarter earnings report, due after the market close on Thursday.
KeyBanc analyst Justin Patterson highlighted Reddit's large online community and the increasing value of user-generated content for artificial intelligence models as key drivers. "We believe this makes Reddit complementary to search, social, web, and LLMs, providing the Company with a durable source of traffic," Patterson wrote. He added that Reddit's content can be monetized through advertising and data licensing.
The analyst sees Reddit on track to reach its long-term target of one billion users, with AI-generated citations expected to become an additional growth catalyst. The firm also expects Reddit's investments in community engagement and advertising monetization to support sustained annual revenue growth of more than 30%. KeyBanc projects revenue reaching $3.24 billion in 2026, rising to $4.30 billion in 2027 and $5.46 billion in 2028, while EBITDA is forecast to climb from $1.43 billion to $2.73 billion over the same period.
KeyBanc also noted that Reddit's capital expenditures account for less than 1% of revenue, which could allow improving EBITDA margins to translate into stronger free cash flow generation. The brokerage expects the company to eventually achieve an EBITDA margin of around 50%, supported by its asset-light business model. For context, similar dynamics have been observed in other tech names, such as CrowdStrike's recent analyst optimism around AI security opportunities.
Despite the positive outlook, Reddit shares remain down about 22.4% year to date, though the stock has gained more than 20% over the past three months. According to LSEG data, 20 of the 30 analysts covering Reddit rate the stock either Buy or Strong Buy. The broader market has seen similar analyst-driven moves, such as Berkshire Hathaway's recent gains following an upgrade.
However, uncertainty surrounding Reddit's AI licensing agreements remains a key risk. The Wall Street Journal recently reported that Reddit is reviewing its 2024 agreement allowing Google to access Reddit content for AI training. RBC Capital Markets warned that ending the arrangement "would be a significant step backward," while Wells Fargo flagged potential pressure on user growth, revenue, and valuation, including a possible $500 million impact on AI licensing revenue. DA Davidson also cautioned that limiting AI access could weigh on daily active user growth, particularly among logged-out users.
Wall Street expects Reddit to report second-quarter revenue of approximately $730 million, up from $499.6 million a year earlier, with earnings per share projected to more than double to $0.97 from $0.45, according to Koyfin. The company's ability to balance AI monetization with community trust will be a focal point for investors. As seen with Nvidia's AI-driven upside potential, the AI theme continues to shape analyst outlooks across the tech sector.
Reddit currently operates more than 100,000 Subreddits, and KeyBanc argues that the platform's community-driven discussions have become increasingly valuable for large language models and AI training. "RDDT is a unique way to participate in AI growth with an asset-light business model," Patterson concluded.
This article is for informational purposes only and does not constitute financial advice.
