In 2012, Metaplatforms (then known as Facebook) caused quite a stir with its IPO. Twitter followed in 2013, but was later privatized and renamed X by Elon Musk. Snapchat And Pinterest went public in 2017 and 2019, respectively. And now there's another social media platform you can invest in.
Reddit'S (RDDT -8.80%) Stock trading on the New York Stock Exchange (NYSE) began on Wednesday, March 20, 2024. The stock shot up 48% on its first day on the market.
It will take a long time
Although Reddit is new to the stock market, the company has been around for almost two decades. University of Virginia roommates Steve Huffman and Alexis Ohanian founded Reddit in 2005 with the intention of creating a website that would be “the front page of the Internet.”
Huffman, who serves as Reddit's CEO, wrote in the company's regulatory filing to list its shares on the NYSE that the site was operational for two months before it had enough user posts to fill its front page. Then there was a traffic explosion.
Today, Reddit has an average of 73 million unique users per day. It has an average of 267 million weekly users. The social media platform hosts more than 100,000 active communities with a wide range of interests.
Why go public after being a private company for so long? Huffman said users have a “deep sense of ownership of the communities they create on Reddit.” Management wanted “that sense of ownership to translate into real ownership – so that our users are our owners.” Reddit also wanted to reward its employees who worked hard to build the platform.
Why so much investor excitement about Reddit's IPO?
It is likely that many of the investors who bought Reddit shares early in trading are actively using the company's platform. They recognize the value that Reddit offers. However, other investors might simply pay attention to the company's growth prospects.
Reddit generated $804 million in revenue last year, up 21% from 2022. The company's gross margin was an impressive 86%, up from 84% a year ago.
Advertising is Reddit's main source of income. The company believes its platform offers a unique value proposition for advertisers because its highly engaged users participate in “trusted, passionate communities.” In a survey commissioned by Reddit last year, 75% of users said they view the site as “a trusted place” to help them make product purchasing decisions.
Reddit expects e-commerce to be another key growth driver. A number of marketplaces have already been launched in its online communities, including Photoshop services. The Company is advancing initiatives to promote additional e-commerce services and believes it can monetize these efforts.
Perhaps the most intriguing attraction for Reddit is its association with artificial intelligence (AI). The company's platform contains over 1 billion posts and over 16 billion comments. It is one of the top ten most visited websites in the United States. This rich content makes Reddit a leading training source for large language models.
In February, alphabetGoogle's division has signed a $60 million deal with Reddit to use its site to train AI models and improve Google search. Reddit also gained access to Google's AI models to improve its platform.
Reddit and cry?
Should you buy Reddit after its sizzling IPO? I'm on the fence about this stock for a few reasons.
First, after nearly 20 years in business, Reddit has never made a profit. The company reported a net loss of $90.8 million last year. I'm not convinced Reddit is on a solid path to profitability.
Second, thanks to its spectacular IPO, Reddit's market capitalization is now around $8 billion. This corresponds to a price-to-sales ratio of almost ten times. While the company's growth is solid, it doesn't seem to justify such a premium valuation.
Third, it's possible that AI-powered virtual assistants could reduce Reddit's traffic and user engagement in the future. In this case, the company's advertising revenue decreases. Additionally, if AI-generated content floods Reddit's communities, it could cause some users to leave the platform.
Admittedly, these concerns may be overblown. Reddit could be profitable in a few years. Its growth could accelerate. AI could provide a tailwind rather than a headwind.
I'm not suggesting that investors who buy Reddit now will regret it later – a “Reddit and cry” scenario. However, there is currently too much uncertainty to dissuade me from this new stock.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights has positions at Alphabet, Meta Platforms and Pinterest. The Motley Fool has positions in and recommends Adobe, Alphabet, Meta Platforms, and Pinterest. The Motley Fool has a disclosure policy.
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