Reddit stock pares intraday gains despite double dose of good news

Reddit Inc (NYSE: RDDT) opened sharply up on a double dose of good news this morning but then pared its entire gain to turn red within an hour.

Morgan Stanley analyst Brian Nowak upgraded the forum social network today to “overweight”. His $200 price target suggests another 25% upside from here.

Additionally, the company launched a new AI feature dubbed Reddit Answers as well on Monday.

Still, its shares are down close to 3.0% at writing perhaps due to aggressive profit-taking in the social media stock that at one point was up 350% versus its year-to-date low in April.

Other than that, there’s no explanation (news, filing, or update) for such a material sell-off in Reddit stock on Monday.

Why is Morgan Stanley bullish on Reddit stock?

Morgan Stanley is convinced that investors haven’t missed the boat on Reddit stock even though it has already quadrupled this year.

Why? Because it’s “rapidly shipping its pipeline of engagement and advertising initiatives” that analyst Brian Nowak expects will “drive industry-leading user, time spent, and ad revenue growth.”

He’s convinced that RDDT will expand its user base while maintaining industry-leading incremental margins next year.

Reddit is on track to end this year with daily active users (DAUs) well over its initial expectations for 2024.

Morgan Stanley recommends owning Reddit stock as its global ad revenue will surpass $3.0 billion by 2027 on the back of rapid growth in machine learning and ad automation.

Here’s what we know about Reddit Answers

Reddit Answers is aimed at helping people find answers more quickly than ever before. It will rely on posts on the platform instead of sourcing responses from the web at large.

The company is testing its new AI feature with a small subset of US users before rolling it out more broadly.

Reddit Answers is “more about building a bridge to the content than it is about being a replacement for it,” Serkan Piantino – the vice president of Reddit said in an interview today.

The new offering will help users find answers to all queries except ones deemed “not safe for work (NSFW), as per a press release on Monday.

Despite rapid growth, Reddit stock does not currently pay a dividend.

Should you buy Reddit shares today?

Reddit stock returning to the price at which it closed on Friday may have created a good buying opportunity for investors.

On Monday, famed investor Jim Cramer reiterated his bullish stance on RDDT as well, saying, “Maybe it was worth $300 all along and it’s just totally mispriced.”

Cramer is positive on Reddit shares as he has immense confidence in the leadership of its chief executive – Steve Huffman.

In October, the New York-listed firm came in handily above Street estimates for its third quarter as well.