Is IPO Stock Reddit a Buy Now?
The highly anticipated debut of social media site Reddit (NYSE: RDDT) as a public company sent the stock skyrocketing to a 52-week high of $74.90 in March. The firm priced shares at $34 before going live on March 21.
IPO stocks are tricky investments for retail investors, who don't often get access to shares until they go public. That is, unless you're among the fortunate Reddit users, called Redditors, who were furnished with pre-IPO shares by the company as a thank you for helping its site grow.
Since reaching its high, Reddit's stock price returned to earth, trading around $43 at the time of this writing. Does this drop create a buy opportunity?
Answering that question requires a closer look at the company. Let's dig into where Reddit is at currently to evaluate its potential as a long-term investment.
Reddit's strengths
Founded in 2005, Reddit gained popularity as a platform where users can form online communities around different topics, known as subreddits. The company had over 100,000 subreddits at the end of 2023.
This helped Reddit become one of the top 10 most-visited websites in the U.S. last year, according to online traffic tracking firm Similarweb. Reddit was also a prominent site contributing to the rise of meme stocks in recent years.
In the fourth quarter of 2023, Reddit averaged 73.1 million daily active unique users (DAUq), which it defines as a person who visited the site at least once in a 24-hour period. This is up from the prior year's average of 57.5 million.
Reddit's user growth enabled the company to reach $804 million in revenue last year, up from 2022's $666.7 million. This kind of year-over-year revenue increase is desirable in a growth stock.
In addition, the company boasts a high gross margin, which grew in 2023 to 86% from the prior year's 84%. Reddit also sports a strong balance sheet. It exited 2023 with $1.6 billion in total assets compared to $155.9 million in total liabilities.
Factors to consider with Reddit
However, despite growing revenue and gross margin, Reddit is not profitable. It posted a net loss of $90.8 million in 2023.
That said, this better than 2022's $158.6 million net loss. Also, it's common for tech stocks to remain unprofitable for years in pursuit of business growth.
Reddit currently makes nearly all of its revenue from digital advertising, making its sales susceptible to the cyclical nature of the ad industry. So the company has plans to diversify its revenue sources.
For example, Reddit is considering the sale of its data. The company has access to a wealth of information on various topics through its subreddits, and Redditors generated an average 1.2 million posts and 7.5 million comments daily in 2023. Artificial intelligence software requires a large amount of data as a means to train the AI to perform tasks with accuracy. In this context, Reddit believes its substantial data repository can provide value to businesses building AI tech.
Another potential revenue area is Reddit's budding e-commerce capabilities. Some Redditors have already created informal marketplaces, such as selling sporting goods on the site.
The company stated, "We want to develop this user-powered economy on Reddit." But currently, the firm sees this and its data selling strategy as longer-term growth opportunities. It will probably be some time before meaningful revenue develops from these channels.
To buy or not to buy Reddit stock?
One factor supporting an investment in Reddit shares is the advertising industry's growth. Global digital ad spending is projected to reach $667.6 billion in 2024, up from $601.8 billion in 2022.
This spending is forecasted to hit $870.9 billion by 2027. The ad industry's expansion provides a tailwind for Reddit's revenue.
In addition, the current consensus among Wall Street analysts is an overweight rating with a median share price target of $50 for Reddit stock. This indicates a belief in some upside from the current price.
But the nature of IPOs means publicly available information about the company's past performance is limited. This makes it difficult to assess if Reddit's business is capable of sustained, long-term user and revenue growth.
That's why it's worth waiting to buy at least until Reddit releases its first earnings report as a public company on May 7. And it's preferable to watch the firm's performance over several quarters to see if trends emerge to make the stock a compelling investment.
For instance, you'll want to see ongoing year-over-year sales increases and improvement on its 2023 loss from operations of $140.2 million to prove Reddit can move toward becoming cash-flow positive. For now, buying this IPO stock is only for investors with a high risk tolerance.
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Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is IPO Stock Reddit a Buy Now? was originally published by The Motley Fool
