Reddit: Don't Buy The Hype?

Seeking Alpha03-26

Reddit priced its shares at the top of the range for its IPO and saw a 48% increase in share price on its first day of trading.The social media platform is not profitable and has an unimpressive ...

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Targarean
·03-26
A repeat of the meme frenzy. Version 2.0
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买香蕉也用券
·03-26
Short it ! Free money
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MIe
·03-26
Reddit meme
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DangerDanger
·03-26
Great article, would you like to share it?
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Reddit’s shares soared 48% on their first day of trading, but corrected 9% on Friday, likely on the back of profit taking. However, the social media platform is not profitable, not even on an adjusted EBITDA basis, and the company’s revenue growth rates are not too impressive either. Considering that investors currently pay a massive 7.6X sales for this unprofitable social media business, I believe the risk profile is highly unfavorable and investors may want to sell into the strength!IPO pricing and initial market reactionReddit is a social media platform that hosts online communities and is very popular with younger users. In December 2023, 76 million users visited Reddit each day, on average. Reddit is most commonly known for a question-answer style communication flow and the company has more than 100k unique communities that users engage in. The social media company mostly makes its money from digital advertising that is placed on Reddit's online communities.Reddit’s IPO has been in the making for a number of years and the firm achieved a massive $10B valuation in 2021. Due to strong investor demand for the company’s shares ahead of the initial public offering, the social media company priced its shares at the top of the range at $34. After Friday's price drop, Reddit now has a market cap of approximately $7.3B which is quite expensive when the company's fundamentals are considered.Taking a look at Reddit’s fundamentalsReddit’s financial disclosures ahead of the Initial Public Offering showed that the social network generated $804.0M in revenues in the 2023 fiscal year, showing a year over year growth rate of 21%. The social media company is, however, not profitable based off of either net income or free cash flow and has not turned a profit since it was founded in 2025. Of the $804M in revenues, $788.8M were advertising revenues, also showing 21% year over year growth.RedditAs I said, Reddit is not yet profitable, not even on an adjusted EBITDA basis. The social media company generated an adjusted EBITDA loss of $69.3M in FY 2023 which marked a narrowing of losses compared to the previous year. However, investors are unlikely to see positive adjusted EBITDA, or net income, or free cash flow, in FY 2024.RedditInvestors are likely overpaying for Reddit's revenue potentialSince Reddit has no profits to speak of and also no positive adjusted EBITDA or free cash flow, the only real way to value the social media company is based on its expected revenues. Reddit achieved $804M in revenues last year and may be able to grow its top line at a similar rate as last year, ~20%. This implies a projected top line of $960M in FY 2024 which in turn implies, with a current market cap of $7.3B, a price-to-revenue ratio of 7.6X.The closest competitor for Reddit is likely Pinterest (PINS) although this platform is more image-driven than based off of communication threads. Pinterest is projected to achieve a similar top line growth rate than Reddit in FY 2024 (~17%) but shares trade only at 6.4X revenues... and Pinterest is already profitable. In other words, Pinterest is generating positive earnings and cheaper than Reddit which translates, in my opinion, to an unattractive risk profile.If Reddit were to be valued at Pinterest's P/S ratio, then the social media company would have a fair value of $40, implying approximately 13% down-side revaluation potential. Meta Platforms (META) is trading at 8.2X FY 2024 revenues and is projected to grow its top line ~17%, but this social media company is also massively free cash flow-profitable. In other words, investors can buy more profitable, more established social media platforms at similar price-to-revenue ratios, implying that investors are currently mostly driven by hype than a sober evaluation of the company's fundamentals.Risks with RedditThe biggest risk for Reddit relates to the company’s high valuation based off of revenues and its rather unattractive profitability profile. The social media platform is burning through cash -- it had negative free cash flow of $85M in FY 2023 -- and the trajectory is unlikely to fundamentally change in the short term. A down-turn in the digital advertising market, given the lack of revenue diversification, would likely heavily weigh on Reddit's valuation factor as well!Final thoughtsReddit obviously had a quite successful Initial Public Offering with shares soaring 48% on the first day of trading and then extending their gains on Friday. The company now has a market value of $7.3B, but neither positive earnings, adjusted EBITDA or free cash flow. In terms of valuation, Reddit is extremely highly valued and the top line growth rate of 20% is really not that spectacular. As a result, I believe that there is a lot of hype around Reddit that from a fundamentals/investment point of view is not really justified. While speculation may drive Reddit’s share price higher in the short term, the risk profile is quite unattractive, in my opinion, and I would recommend investors to either take profits or stay on the sidelines!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":288480039080256,"gmtCreate":1711462438625,"gmtModify":1711462442266,"author":{"id":"3573540190522229","authorId":"3573540190522229","name":"Targarean","avatar":"https://community-static.tradeup.com/news/59de1c73df3e7e460bd84cc786850fa6","vip":1,"hat":"https://static.tigerbbs.com/ae1f49570794979e009a5efdeb6f4789","crmLevel":7,"crmLevelSwitch":1,"authorIdStr":"3573540190522229","idStr":"3573540190522229"},"htmlText":"A repeat of the meme frenzy. Version 2.0","listText":"A repeat of the meme frenzy. Version 2.0","text":"A repeat of the meme frenzy. Version 2.0","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/288480039080256","repostId":2422682405,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":288470590529720,"gmtCreate":1711460115807,"gmtModify":1711460119898,"author":{"id":"4109941540501062","authorId":"4109941540501062","name":"买香蕉也用券","avatar":"https://community-static.tradeup.com/news/bd3a71caa40eb6e0d2468ff0ffa1a967","vip":1,"hat":"https://static.tigerbbs.com/a3dee1aa3a3a3c1814833a4d3f8a5669","crmLevel":2,"crmLevelSwitch":1,"authorIdStr":"4109941540501062","idStr":"4109941540501062"},"htmlText":"Short it ! Free money&nbsp;","listText":"Short it ! Free money&nbsp;","text":"Short it ! Free money","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/288470590529720","repostId":2422682405,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":288462534762536,"gmtCreate":1711458068678,"gmtModify":1711458070644,"author":{"id":"3577182936341023","authorId":"3577182936341023","name":"MIe","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":6,"crmLevelSwitch":0,"authorIdStr":"3577182936341023","idStr":"3577182936341023"},"htmlText":"Reddit meme&nbsp;","listText":"Reddit meme&nbsp;","text":"Reddit meme","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/288462534762536","repostId":2422682405,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":288439851937816,"gmtCreate":1711430262730,"gmtModify":1711431964119,"author":{"id":"4170553422958512","authorId":"4170553422958512","name":"DangerDanger","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"authorIdStr":"4170553422958512","idStr":"4170553422958512"},"htmlText":"Great article, would you like to share it?","listText":"Great article, would you like to share it?","text":"Great article, would you like to share it?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/288439851937816","repostId":2422682405,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":13,"commentSize":4,"repostSize":4,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}