$Reddit(RDDT)$ Since its IPO in March, Reddit's stock has risen by about 19%, bringing the company’s market value to just under $10 billion. With $1.7 billion in cash and investments, its enterprise value is $7.6 billion.
RDDT Price Chart
Earning Overview
Reddit's revenue over the past 12 months amounts to $981 million, though the company is barely profitable. Its net income stands at a loss of $574 million, largely due to stock-based compensation tied to the IPO.
EBITDA & Free Cash Flow
More meaningful figures show adjusted EBITDA of just $66 million and free cash flow of only $23 million. These numbers contribute to Reddit’s high valuation of over 300 times free cash flow and 115 times EBITDA, which helps explain why short interest in the stock exceeds 13%.
Fundamental Analysis
However, there is a group of investors who view Reddit as vastly under-monetized and believe it holds significant potential. Reddit’s average revenue per user is under $3, compared to Facebook's over $40.
As a platform business, Reddit has the ability to quickly translate revenue growth into profit. In the first half of this year, the company increased revenue by $177 million, with $135 million flowing directly to EBITDA. This shows that Reddit can rapidly enhance its profit margins if top-line revenue continues to grow—and it is. Revenue grew by 21% in 2023, with the trailing 12-month figure showing an acceleration to 37% growth.
It's also worth noting the possible factors behind this acceleration. Reddit has likely become more effective at monetizing ads and earned at least $200 million from licensing its data to companies like Google, OpenAI, and Sprinklr. Additionally, Reddit appears to be experiencing a notable surge in web traffic, especially following a partnership with Google.
Market Sentiment
Reddit's market sentiment has been somewhat mixed in recent months, with investors showing both optimism and caution. Since its IPO, Reddit stock has shown a 19% increase, bringing its market value close to $10 billion. This growth is largely attributed to its strong revenue growth, including a 21% increase in 2023, and an accelerating growth rate of 37% in the trailing twelve months.
Investor sentiment around Reddit stock is also influenced by its short interest, which has risen to over 10%, indicating bearish sentiment in the market.
Additionally, some investors view Reddit as under-monetized, given its low average revenue per user compared to rivals like Facebook. This leads to the belief that the platform has significant growth potential if it can better capitalize on its user base
Risk
From a market perspective, Reddit's valuation of under $10 billion doesn’t seem particularly steep, especially when considering that $Pinterest, Inc.(PINS)$ is valued at $22 billion and Twitter sold for over $50 billion. However, there are concerns about Reddit's management and its ability to control costs. It remains unclear why a company with 88% gross margins has yet to produce significant net profits. Founded in 2005, Reddit has spent nearly a billion dollars on R&D, yet is only now rolling out basic features like spell check and auto-complete. The company's dual-class share structure also limits shareholder influence.
Share Sale Plan Sparks Fear
$Reddit(RDDT)$ share sale plan has sparked concern among retail investors, particularly due to significant insider sales by executives like CEO Steve Huffman and director Michael Seibel, who recently sold millions of dollars' worth of stock. These moves have led to questions about the company's future growth trajectory.
While Reddit has made notable progress in monetizing its platform, questions remain about its ability to manage costs and achieve consistent profits. Retail investors are particularly cautious about the insider transactions, fearing they could signal a peak in the stock's value.
Conclusion
While there’s a strong argument that Reddit is a valuable asset, especially if attention is the new oil, the stock’s potential is uncertain. If growth slows, the stock could stagnate.
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