To The Moon

It was not long before those who is still wondering how long $Reddit(RDDT)$ initial public offering (IPO) would last. Only two days into trading, we saw Reddit experience a pullback and the stock price is down over 14% at Thursday (28 Mar 2024) market.

We can see the last traded price at $49.32, after hours close price at $48, just one dollar more than the opening-day pricing of $47 per share.

Insiders Selling Despite Informative Buys In Last 3 Months

We saw on late Wednesday (27 Mar), the Reddit CEO and other top executives sold a total of $41.245 million worth of Reddit shares. This is just one week after Reddit has its IPO.

While we should not be too concerned about the insiders selling too much shares, the timing of the sales is worth to ponder about.

Let us take a look at how Reddit make money and what could have create the hype at first when the initial public offering was launched.

Reddit Average Revenue Per User (ARPU) vs Daily Active Users (DAU)

If we look closely to the average revenue per user (ARPU) of Reddit services worldwide from 1st quarter 2021 to 4th quarter 2023.

We could see that Reddit’s average revenue per user (ARPU) is growing quite strongly, but the growth of its daily active users (DAU) does not show similar pattern.

Over the last 3 quarters of 2023, we could see that the daily active users is pretty flat, and Q4 2023 we saw quite a good growing daily active users (DAU), but that does not translate to rapid growth in revenue.

We will examine the breakdown of its revenue and expenses of 2023.

Reddit Revenue and Expenses Breakdown - 2023

If we look at the revenue for 2023, Reddit has quite a significant revenue of $804.03 million, but if we look at the expenses side, it show $833.18 million, so it give me doubt of how Reddit could possibly work towards profitability.

The gross profit before expenses stands at 693.02 million, and it will not be enough to sustain the operating expenses, so we could see Reddit raising money through equity and possibly debts.

We will look at that in later article.

Why Market Is Hyped Up Of Its IPO

Two things I observed that could have caused the stock price hyped up during Reddit IPO. I will be sharing what I have observed in terms of Intrinsic Value and Analysts Future Earnings Forecast.

Intrinsic Value

The intrinsic value of Reddit observed show that it is undervalued by 60%, as its fair value stands at $123.20. But is it true? Did we take into account that Reddit might need to seek further fundings to sustain its operation?

Analyst Earnings Growth Forecast

If we compared the earnings vs savings rate, we could see that Reddit is forecast to become profitable over the next 3 years, which is considered faster growth than the savings rate (2.3%). Provided that they do not take on much debts and able to work within the repayment.

Similarly, when comparing earnings with the market, Reddit is also forecast to become profitable over the next 3 years, which is considered above average market growth. With a forecast high growth earnings, Reddit is expected to become profitable in the next 3 years.

We will need to be careful on this as we also need to consider the price to sales as Reddit appeared to be expensive.

Reddit Expensive Based On Price-To-Sales Ratio

If we look at the price-to-sales ratio for Reddit as compared to industry, Reddit is expensive based on its Price-To-Sales Ratio (10x) compared to the US Interactive Media and Services industry average (1.7x).

So this might overturn the earlier suggestion that Reddit is trading undervalued almost 60% from its intrinsic value.

As investors, I believe we also need to look at and assess if there is any risk that Reddit might potentially afford or are already in.

Reddit Risk Ongoing and Future

If we looked at the past months, how other social media platform CEOs have to deal with some compliance, Reddit as a social media platform already showcases some risks associated with content moderation, privacy, and regulatory compliance.

Reddit could create a debate about user privacy as it planned to introduce the AI data licensing. AI data licensing would mean that the third party can use the user-generated data on Reddit to develop AI models like ChatGPT or Gemini.

Reddit has highlighted that its AI data-licensing business is investigated by the Federal Trade Commission (FTC) right before its IPO. This investigation of the FTC represents a potential risk for Reddit. Reddit operations, financial stability, and growth would be impacted by this users’ data privacy and regulatory challenges. There is already widespread disappointment across the communities because of Reddit’s commitment to data licenses.

Something that we need to take note, is Reddit does not have a solid revenue stream like other competitors like $Meta Platforms, Inc.(META)$ Facebook or Instagram. Because this platform is user-focused, which means it has a very high customer engagement.

How Reddit translate these users engagements into profitability through advertising or subscription is still very vague. If Reddit becomes too commercialized, it may lose its users, only if they find a good way to increase its profitability, then I will consider this stock.

Summary

After looking closely at how Reddit road to IPO build up, we could actually see some tell-tale along the way. There have been some data that seemed to be possible, but if we were to delve deeper, we would find that it is actually not that true.

So as investors, it is important for us to understand the different aspect of fundamental for a stock especially during after IPO trading.

Appreciate if you could share your thoughts in the comment section whether you think Reddit could find a way to increase its profitability in the short term without compromising its users growth?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.