After its recent initial public offering (IPO), shares of Reddit Inc. (NYSE: RDDT) have become a focal point for investors looking to find the next big social media platform. The stock has delivered a relatively flat performance since its IPO in March 2024, but that could mean good news for investors.
Recent IPOs typically attract a lot of market action and hype as investors fall into mass behavior and the pretty marketing behind these companies. Investors must remember that the investment banks that take these companies public will collect a higher fee based on how expensive they manage to launch the stock.
For this reason, now that the hype period is over, Reddit stock could find its footing for calmer markets to take over and give investors a more straightforward path to where this company may be headed. Of course, absent price action would lead these potential buyers to the company’s financials, where proper fundamentals prevail.
It’s a Tight Field, but Reddit Isn’t Last
Investors can find all they need within the Security and Exchange Commission’s ‘Bam’ site, where Reddit filed its pre-IPO prospectus for investors to gauge the stock’s potential value.
While not an apples-to-apples comparison, investors should compare Reddit’s numbers to Meta Platforms Inc. (NASDAQ: META), as the company controls two of the world’s largest social media communities: Facebook and Instagram. On a closer comparison -- mainly based on size -- investors can look at Pinterest Inc. (NYSE: PINS) and Snap Inc. (NYSE: SNAP) to compare Reddit’s progress being the newer name on the block.
According to the company’s prospectus, 32% of Reddit users reported not being active on Facebook. In comparison, 37% reported not being active on Instagram. These numbers have become much more significant regarding Pinterest and Snapchat.
59% of active Reddit users were not active on Pinterest, and 73% reported not being active on Snapchat. Despite being unfamiliar to investors and the stock market, Reddit has achieved significant market share to command the premiums it does today.
As of December 2023, the United States was responsible for 48.5% of Reddit’s traffic, and with an average visit duration of roughly seven minutes, investors have a new issue to worry about: monetization.
Can Reddit Keep Up With the Market?
Similar to X (formerly known as Twitter), short-term visits make it harder for the platform to achieve monetization, though Reddit has an advantage over X in this regard. Reddit management proposes three ways to monetize the company's community features.
- Advertising: As most of Reddit’s search engine is powered by organic search, advertisement-based searches have a long way to go in terms of how Reddit can monetize its audience.
- Data Licensing: Data is now considered the new oil, making Reddit a proverbial driller ready to refine the explored data through artificial intelligence and resell it to advertisers and other firms interested in the commodity.
- User Economy: As data combined with advertising and organic searches connects more and more people, Reddit’s community could—and is—starting to see digital and physical goods exchanges.
Acting as a middleman, the platform could start to monetize these transactions by collecting fees or subscriptions to a marketplace.
The Market Likes the Proposition
[content-module:CompanyOverview|NYSE:RDDT]Reddit’s quarterly average revenue per user (ARPU) stood at $3.42, up 9% from the previous quarter and showing a three-year compounded average growth rate (CAGR) of up to 12.4%. Investors can deduce from these figures that, as ARPU grows larger, percentage growth rates will slow, and that’s a good thing.
For this reason, markets bid up Reddit’s price-to-sales valuation to roughly 10.5x, compared to Pinterest’s 7.8x and Snapchat’s 5.7x. Expecting to see above-average revenue growth rates, markets feel comfortable paying a premium for this stock.
Adding to the high hopes for investors looking at Reddit’s revenue growth, ex-U.S. ARPU has a lot of catching up to do. That figure is only at $1.34, up 17.5% over the quarter and showing a three-year CAGR of 23.7%. Because Reddit hasn’t penetrated international markets yet, revenue potential has a lot of runway to cover before it takes off.
Now trading at 61% of its 52-week high (not much to speak of based on the recent IPO), Reddit trades below Snapchat’s 89% and Pinterest’s 97%. This way, investors could get the most aggressive growth story at a reasonable discount.
