Investing.com -- Roth MKM reduced its Reddit stock rating to Neutral from Buy on Wednesday, while lifting the price target to $195 from $116, due to a more balanced near-term risk-reward profile at current valuation.

Since Reddit's (NYSE:RDDT) initial public offering (IPO) in March 2024 at $34 per share, the stock has seen a substantial rise of about 450%, outpacing the S&P 500's growth of 15%. This surge is attributed to a roughly 40% increase in estimates and a 310% expansion in the enterprise value to revenue multiple.

According to Roth MKM, Reddit's current valuation stands at nearly 19 times its projected 2025 revenues and about 65 times its projected 2025 EBITDA, which is above its peers when adjusted for growth, scale, and profitability.

The downgrade decision is influenced by a mix of factors, including an anticipated deceleration in revenue growth quarter-over-quarter and potential deterioration in incremental EBITDA margins over the next 12 months.

Tough comparisons for user growth in the first half of 2025 and the likelihood of management reinvesting revenue upside into growth, potentially lowering the incremental margin profile this year, also contributed to the rating revision.

“We believe RDDT mgmt. would reinvest revenue upside into growth opportunities as 2025 progresses, effectively lowering incremental margin profile this year,” Rohit Kulkarni, Managing Director of Roth MKM, said in a note.

Kulkarni points out that Reddit's performance in the past three quarters has been strong, with revenues consistently exceeding the high end of guidance by about 10% and next-quarter guidance surpassing analyst estimates by 6% to 9%.

However, for Reddit stock to maintain its positive momentum at the current valuation levels, fourth-quarter revenues are expected to top $440 million, and the high-end guidance for first-quarter revenue should exceed $400 million.

Despite the downgrade, the analyst acknowledges that Reddit has several potential catalysts that could drive growth, including new ad formats, AI data deals, a developing developer platform, and the influence of retail investors betting on Reddit's role in AI.

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