Is Investing in Reddit's Shares Still Recommended?
The subforums on Reddit (RDDT 6.41%) have made it a standout sensation in the social media realm in recent years. Many of these forums offer info and assist users in answering queries, making them a valuable resource.
The company harnessed this popularity when it launched its initial public offering (IPO) in March. Since then, Reddit shares have seen a surge of over 150%. However, the question remains whether this growth justifies purchasing the stock, or if it's already too late and investors should avoid it.
To decipher the ideal approach, a more in-depth examination of Reddit's business and financials is necessary.
Diving into Reddit's operations
Reddit describes itself as a "community of communities." Users create and engage with social media communities based on hobbies, interests, or passions. It boasts more than 100,000 active communities, attracting more than 97 million daily active unique users to its forums. From these communities, Reddit claims to be one of the internet's largest sources of information.
Similar to other social media stocks, the company generates revenue through digital advertising, its primary revenue source. Additional income streams include premium subscriptions and data licensing. These income streams should continue to support the company's growth as users continue to flock to the site.
Moreover, its approach of creating and managing forums provides it with a competitive edge in the social media sphere. Social media alternatives like X or those operated by Facebook parent Meta Platforms are not designed to compete with such a site. Competing sites are unlikely to surpass Reddit due to its significant user base.
The market leadership is advantageous for the stock. Shares priced at $34 per share in March initially saw little traction, but have seen a significant surge lately, leading to the mentioned 150% increase over its short lifespan.
Analyzing Reddit's financials
However, one must question whether the stock price has outpaced its financials. In the first nine months of 2024, Reddit reported revenue of $872 million, a 57% increase compared to the same period in 2023. Alongside this growth, costs and expenses ballooned by 113%. This resulted in a loss of $555 million during the first three quarters of 2024, compared to a loss of $106 million in the previous year.
However, most of this spending occurred in the first quarter as stock-based compensation escalated around the time of the IPO. With that expense minimized, Reddit reported net income of $30 million in the third quarter, suggesting a healthier financial picture than the nine-month financials might suggest. In fact, analysts predict positive net income in 2025 and a 30% revenue increase. Despite the rapid growth, investors will have to grapple with a decelerating growth rate, which could dampen investor enthusiasm for the stock.
Its price-to-sales ratio (P/S) is 17, a figure that has risen in tandem with the stock price. Its forward P/E of 72 also indicates the stock has become expensive. Such metrics may persuade investors that they've missed out on this bull market in the stock.
Is the stock still a buy?
In the current climate, Reddit stock is likely an attractive buy for long-term investors.
While the surging price and valuations should prompt investors to exercise caution, few can deny that Reddit's approach to social media resonates with both users and investors. This should prompt significant revenue growth and, more likely, sustained profitability.
Given Reddit's impressive user base and revenue streams, investors might consider diversifying their portfolio by investing in its shares. However, the high valuations necessitate careful consideration as the stock's price-to-sales ratio and forward P/E are relatively high. It would be wise to conduct further financial analysis or seek advice from financial advisors before making an investment decision.
Moreover, with analyst predictions of positive net income in 2025 and a 30% revenue increase, the stock could potentially offer substantial returns for those willing to invest with a long-term perspective. In this context, investing in Reddit's shares could be an opportunity to capitalize on its strong financial growth prospects.
