Reddit (RDDT) should continue to grow despite weaker search traffic, helped by improving ad products, higher-value app users, stronger profits and potential AI licensing deals, Wedbush said in a note Friday.

The recent drop in US daily active users appears temporary rather than a long-term problem, and Reddit is expected to gain more control over traffic by moving more users directly to its app, Wedbush said, adding that improving app retention, better feed recommendations and conversion of web visitors into app users should support daily user growth and stronger engagement over time.

The investment firm raised its Q3 revenue estimate by 5%, citing continued improvement in advertising products and monetization after Q2 revenue came in 10% above consensus, expecting Reddit's ad business to remain a key growth driver as Reddit Max gains more advertisers and newer ad products help the company generate more revenue from its user base.

Reddit is expected to retain bargaining power in future AI data licensing talks because its content remains useful for model training, with potential buyers extending beyond Alphabet's (GOOG, GOOGL) Google and OpenAI, according to the note.

Wedbush cut its price target to $221 from $250 and maintained an outperform rating for Reddit while keeping it on the Best Ideas List.

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