Reddit inventory is up 124% since its preliminary public providing earlier this 12 months.
Earlier this 12 months, social media platform and data discussion board Reddit (RDDT -3.50%) accomplished an preliminary public providing (IPO). Like many newly minted public corporations, Reddit inventory skilled an preliminary worth pop however shortly cratered as some traders grew skeptical of the firm’s development prospects. Particularly, Reddit was making a case for having ties to synthetic intelligence (AI), however it wasn’t convincing inventory patrons. The corporate touted how its user data could be leveraged to help big tech companies prepare info workloads and huge language fashions (LLMs).
This concept appeared extra cheap in principle than in actuality and I had some doubts as as to if Reddit might execute on this specific enterprise section. However following the firm’s lately revealed third-quarter earnings report, I am altering my tune.
Let us take a look at how Reddit is getting into a brand new and thrilling development section and assess if now is an efficient alternative to scoop up shares.
How Reddit proved me unsuitable
Simply after Reddit’s mid-March 2024 IPO, I expressed some severe doubts over the firm’s means to develop its core promoting enterprise and make something of its AI pursuits. At the time, Reddit’s worth proposition was a troublesome promote contemplating far bigger opponents equivalent to Meta Platforms and Alphabet dominate the web.
Nonetheless, Reddit’s third-quarter earnings confirmed some surprisingly good metrics. Income grew by a formidable 68% 12 months over 12 months to $348.4 million. Even higher, the younger firm’s free cash flow and internet earnings had been each optimistic figures. Throughout the third quarter of 2023, Reddit was hemorrhaging money.
How did Reddit handle to spearhead this degree of income acceleration whereas additionally producing optimistic unit economics in such a short while? Two levers work in the firm’s favor proper now.
First, Reddit’s every day lively uniques (a proxy for lively customers) rose 47% 12 months over 12 months to 97.2 million. Typically talking, extra customers lead to greater engagement on social platforms. When this occurs, advertisers need to broaden who sees their advertisements, permitting Reddit to monetize its person base extra successfully.
What’s even higher is that Reddit’s common income per person (ARPU) is rising by comparable percentages in each the U.S. and overseas. To me, this implies that advertisers are onboarding to Reddit’s platform at international scale — implying the firm has rising model enchantment in many alternative geographic areas.
Along with its promoting income rising by 56% 12 months over 12 months, gross sales from information licensing rose by a whopping 547%. In easy phrases, I used to be unsuitable about Reddit’s AI plan. This is why.
Picture supply: Getty Photos.
What might AI imply for Reddit in the future?
Although Reddit’s information licensing income grew fivefold 12 months over 12 months, gross sales from this section had been simply $33.2 million throughout the third quarter. Furthermore, for the nine-month interval ended Sept. 30, information licensing income totals $81.6 million — or simply 9% of Reddit’s complete income.
Whereas information licensing stays considerably small for Reddit, I see this chance in an entire new gentle now. Try the desk beneath of Reddit’s remaining performance obligations (RPO) for information licensing agreements.
| Class | January 2024 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|
| Information Licensing RPO | $203.0 million | $188.1 million | $320.3 million | $294.8 million |
Information supply: Reddit.
In lower than a 12 months, Reddit has grown its information licensing offers by tens of thousands and thousands of {dollars}. Furthermore, given these are multiyear offers, the firm will acknowledge these gross sales over time — thereby offering some degree of predictable development for this new AI endeavor.
To me, the AI alternative for Reddit could be very a lot actual and the RPO developments proven above underscore this concept. Whereas information licensing is already a enterprise price lots of of thousands and thousands of {dollars}, Reddit has a profitable alternative to develop this operation in a significant approach as information turns into much more vital for coaching LLMs and generative AI protocols.
Is Reddit inventory a purchase proper now?
I took a shot at benchmarking Reddit in opposition to different social media and data-heavy companies utilizing the forward price-to-earnings (P/E) a number of.
RDDT PE Ratio (Forward) information by YCharts
There are some fairly fascinating takeaways from the developments pictured above. First, each Meta and Alphabet commerce at considerably decrease multiples in comparison with Reddit and Spotify Know-how. One cause for this may very well be that Meta and Alphabet are competing in rather more crowded areas revolving round AI — from social media to digital actuality, cloud computing, office productiveness, gaming, and extra.
Moreover, it is fairly apparent that each Reddit and Spotify have been experiencing some valuation expansion in current durations. For Spotify, I believe a lot of the momentum is rooted in the concept that streaming platforms will grow to be a extra vital megaphone and distribution channel for a wide range of alternatives in the future.
For instance, podcasting platforms had been a go-to for each presidential campaigns this 12 months. I think Spotify and competing platforms will expertise further tailwinds as streaming turns into a extra extensively adopted type of communication alongside conventional broadcasting.
Concerning Reddit, it is fairly clear the firm’s valuation soared following its blowout third-quarter report. Whereas Reddit inventory is fairly expensive consequently, I might not low cost the firm’s development potential. To me, Reddit continues to be an missed alternative at the intersection of knowledge and AI — making it a tempting purchase at a extra cheap worth vary.
Randi Zuckerberg, a former director of market growth and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an govt at Alphabet, is a member of The Motley Idiot’s board of administrators. Adam Spatacco has positions in Alphabet and Meta Platforms. The Motley Idiot has positions in and recommends Alphabet, Meta Platforms, and Spotify Know-how. The Motley Idiot has a disclosure policy.