Loop Capital downgrades Reddit stock to Hold amid valuation concerns: Is it time to cash out?

On Tuesday, Loop Capital analysts downgraded Reddit Inc (NYSE: RDDT) from Buy to Hold, triggering a more than 3% drop in pre-market trading. The downgrade was driven by concerns over Reddit’s valuation, despite Loop Capital maintaining a price target of $75.

Since its March IPO, Reddit’s stock has more than doubled, propelled by robust growth in user engagement, monetization strategies, and expanded advertising initiatives. However, Loop Capital highlighted that Reddit’s current valuation poses risks, particularly as it trades at a significant premium compared to its industry peers.

One of the imminent challenges facing Reddit is the upcoming lock-up expiration on August 9, which could release approximately 133 million shares into the market. This event may lead to selling pressure as early investors consider liquidating their positions, further influencing Loop Capital’s cautious stance.

Open AI partnership & return of Keith Gill

Throughout the year, Reddit has made strategic strides, including a notable partnership with Microsoft-backed OpenAI in June.

This collaboration allows Reddit to leverage its vast user-generated content through AI-powered features, potentially enhancing data licensing revenue and user engagement.

Despite these positive initiatives, Reddit’s stock remains volatile.

Notably, the stock surged when Keith Gill, famously known as Roaring Kitty, made significant trades related to GameStop in June, reigniting interest in Reddit due to its ties to the meme-stock phenomenon.

Quarterly earnings and expectations

In the first quarter, Reddit reported robust earnings with a 48% year-over-year revenue growth to $243 million, surpassing analyst expectations.

The company’s ongoing innovations in platform enhancements, such as improved search capabilities and language translations, have driven its user base and engagement metrics.

Looking ahead, Reddit is set to announce its second-quarter earnings on August 6. Analysts estimate a normalized EPS of $0.12 and a GAAP EPS of -$0.31, with revenue projected around $252.34 million.

These figures will be closely monitored to assess Reddit’s operational performance and its ability to meet market expectations.

Bullish momentum prevails in the short-term charts

To understand the complete picture, a technical analysis of the stock is essential. Examining Reddit’s stock price movements, trading volumes, and chart patterns will provide further insights into the stock’s future trajectory and can help investors make informed decisions.

RDDT chart by TradingView

Following a successful IPO in March this year and a quick ascent to above $70, Reddit’s stock tumbled to below $40 by April 18. However, they have been on an upward trajectory since then and recently broke above their post-IPO high to make a new all-time high at $78 on July 15.

The stock continues to enjoy bullish momentum on the short-term hourly charts. Considering that traders and investors who are bullish on the stock can purchase it at current levels with a trailing stop loss placed below the bullish trendline as seen on the chart, which is currently hovering around $60.4.

Traders who are bearish on the stock should initiate a short position only if the stock starts trading below its recent swing low and 100-hour moving average, both of which are currently near $67.5. If the stock goes below that level they can initiate a short position with a stop loss at $78.10 and can book profits near $55.

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