Reddit’s IPO Roller Coaster: Pump the Brakes on RDDT Stock

Reddit (NYSE:RDDT) stock is a global social media company founded in 2005, that provides an online platform for people to discuss various topics. RDDT stock went public last week at a share price of $47, which increased by 30% to $59.8 just this Monday.

Reddit’s IPO is a move to allow a company to raise capital, and invest for further expansion. Although the company’s unique customized platform attracts more user engagement, there are still some drawbacks in its financial performance and it doesn’t have solid revenue streams compared to other competitors. I believe its stock should be a hold for now. 

Catalyst 

Reddit’s growth is indicated by its diverse and growing communities. One notable difference between Reddit and other social media platforms is its customized subreddits. These subreddit communities include various discussions on different topics, like sports, lifestyles, news, gaming, etc. This diversity helps Reddit to attract more users, creating an engaged platform for individuals to find and create the community that they are interested in. 

By the end of 2023, Reddit has over 100K+ active communities. The platform has over 73 million active users daily – a 27% increase YoY. Moreover, just like other social media, Reddit expands globally with 49.8% daily users in the US market and 50.2% from the rest of the world. Reddit’s ability to attract new users from different countries comes from its customized platforms for different cultures and languages. With this strategy, Reddit can still have more opportunities to expand internationally from both advertising and user perspectives. I believe that dynamic user activity indicates Reddit’s capabilities to enhance user engagement with customized community content, generating more revenue streams for the company. 

Another catalyst for Reddit’s growth is its revenue stream diversification, including blockchain integrations. RDDT stock continues to invest in developing and adapting new blockchain advancements into its business. In July 2022, the launch of Collectible Avatars marked the starting point for Reddit’s blockchain development. These avatars are created by artists and can be purchased. The importance here is these avatars are stored on the Polygon (MATIC-USD) blockchain, indicating Reddit’s initiative to offer products that can be sold and bought in a decentralized market. In my opinion, this blockchain integration provides Reddit with an opportunity to enhance its operation with the trends in the blockchain and digital assets industry, generating new revenue streams and strengthening its financial growth. 

Valuation

Reddit’s revenue is growing 21% YoY. I estimated the revenue growth of 25% for the FY 2024 and an average of 15% to 20% growth in the future. Although the company’s historical revenue growth isn’t significant, 37.49% in FY2022 and 21% in FY2023, its intention to expand into blockchain, machine learning, and AI could cause stronger growth in the company’s financials. 

One problem with Reddit’s financial performance is its negative operating income across 4 years. However, there is a decrease in the negative income and moves towards profitability. I forecasted that the company’s income could still be negative for FY2024, as its operating income margin for 2023 is -17%. However, for FY2025 and FY2026, RDDT stock could generate a better cash flow due to its integration of blockchain and gain positive income in the upcoming years. 

The WACC is 11.3%, derived using the CAMP formula with a risk-free rate is 4.23% and beta of 1.5. The cash flow is discounted using a 4% terminal growth rate and 11.3% WACC. The model suggested that Reddit’s equity value per share could reach $91.26 a 34% upside compared to the current price of $68.1. 

Risk 

As a social media platform, Reddit showcases some risks associated with content moderation, privacy, and regulatory compliance. Reddit’s introduction of AI data licensing could cause a debate about user privacy. AI data licensing means that the third party can use the user-generated data on Reddit to develop AI models like ChatGPT or Gemini.  Right before its IPO, Reddit indicated that the Federal Trade Commission investigated its AI data-licensing business. This investigation of the FTC represents a potential risk for Reddit. It demonstrates the possibility of users’ data privacy and regulatory challenges, which could impact Reddit’s operations, financial stability, and growth. Moreover, Reddit’s commitment to data licenses also caused widespread disappointment across the communities. 

Another possible risk for Reddit is that it doesn’t have a solid revenue stream like other competitors like Facebook or Instagram. Because this platform is user-focused, which means it has a very high customer engagement; however, its ability to transfer those engagements into profitability through advertising or subscription is still very vague. Moreover, if the platform is too commercialized, it may lose its users. I believe that if Reddit can find a good way to increase its profitability, it will have a greater chance of success.  

Conclusion

In conclusion, Reddit’s IPO marks the company’s strategic moves toward more potential growth. Reddit’s strong growth in subreddit platforms, expansion internationally, and integration of blockchain innovation can surge its stock price up to $91.26. There are also many noteworthy factors along with the company, including low profitability and user data privacy. Therefore, I believe that the stocks should be a hold for now, awaiting further innovations. 

On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.