Communication, entertainment and media consumption are changing faster than ever. We all know this from personal experience. The way people communicate with each other is shifting from traditional media to platforms that create space for real discussion and shared interests. At the same time, advertisers are pushing for platforms that enable precise targeting rather than broad, inefficient reach. Social media platforms that combine these needs are at the forefront of these trends - and Reddit (ISIN: US75734B1008) is currently an up-and-comer like no other.
As one of the largest and most active digital communities, it not only provides a home for millions of interest groups, but also a gold mine of data for targeted advertising. Combined with a scalable platform, strong international expansion, and a business model that capitalizes on the major growth areas of the Internet, Reddit is clearly differentiated from its competitors. The stock is therefore not just a bet on a single company, but on the future of digital sharing and the world of personalized advertising. One key question remains: Can Reddit become another Facebook? Analysts say maybe. The stock price speaks for itself. It has already quadrupled since its IPO this year! Exaggeration or not, the stock market is always right for the moment.
Source: Reddit stock price history, StocksGuide
Reddit is much more than just a social network - it is one of the largest and most active online communities in the world. With around 100 million daily active users and steadily growing revenues, the California-based company has become a major player in the digital advertising market - and is giving meta platforms a run for their money. Despite its high valuation, Reddit stock could remain attractive to investors as it benefits from several strong trends. The following Reddit stock analysis takes a closer look at the drivers of growth and how the company could grow into its valuation.
Key information in a nutshell
- Reddit is a dominant player in the social network, forum, and content aggregator space.
- Strong growth and high potential profitability make the stock an interesting technology bet.
- However, the valuation is extremely high, pricing in a lot of potential.
- Further development of the business model is needed to avoid disappointing investors.
Company Profile - Leading Social News Aggregator
Reddit is an online platform that is a mix of social network, discussion forum and content aggregator. It allows users to create, comment on and rate posts and interact with a community of like-minded people. It is divided into subreddits - specialized forums, each dedicated to a specific topic such as technology, entertainment, politics, or hobbies. Within these subreddits, users can share content such as text, images, videos, and links. Other members can then rate this content with upvotes or downvotes, which determines which posts are most visible within a subreddit and across the platform. This system promotes relevant and popular content while pushing less popular posts into the background.
Nothing new there, but Reddit has a strong community dynamic. Each subreddit community has its own set of rules and moderators to keep order and guide discussions. At the same time, the platform offers a high degree of anonymity, which encourages users to express themselves freely. It is also used to share knowledge, ideas, opinions, and entertainment. It is often referred to as the "front page of the Internet" because many viral trends, news and cultural discussions originate on Reddit.
It all started in 2005 when Steve Huffman and Alexis Ohanian, two University of Virginia graduates, put their idea of social interaction into action. They developed Reddit as a platform that would give users an easy way to share and discuss content. It quickly gained popularity and professional support from Y Combinator, a renowned startup incubator that helped Reddit take its first steps and develop the platform. In 2006, just a year after its founding, Reddit was acquired by Condé Nast, a publishing company known for publications such as The New Yorker and Wired. The acquisition set the stage for further growth. However, a spin-off followed in 2011. It remained under the umbrella of Advance Publications, the parent company of Condé Nast. It still holds nearly 35 percent of the votes after the IPO. The A shares are dominated by Fidelity and Tencent.
In the years that followed, Reddit continued to grow rapidly, becoming one of the most visited websites in the world. Thousands of subreddits emerged, covering niche interests and making the platform usable for a wide range of topics. In 2015, Steve Huffman returned as CEO after Reddit came under fire for management decisions and content moderation. Under Huffman's leadership, the platform was modernized, mobile usage was improved, and commercial revenue was increased, particularly through advertising and premium subscriptions. However, the financial needs remained enormous. Multiple rounds of funding were required, backed by investors such as Tencent and other prominent partners. They ensured that Reddit continued to evolve. New features were developed and the platform was established worldwide. Today, Reddit is one of the world's premier destinations for online discussion, viral content and community engagement.
Walstreetbets and the GameStop Hype
The business of popularity really took off with WallStreetBets (WSB). This is one of the most popular and controversial communities on Reddit. Founded in 2012, the subreddit specializes in discussions about financial markets, stock trading, and especially risky investment strategies. With a relaxed, often humorous and provocative culture, it quickly became a meeting place for traders and investors who take unconventional and speculative approaches that are often ridiculed on Wall Street. Not without reason, as the community is known for its sometimes extremely risky and unprofessional trading decisions using options and leveraged products. Users share their profits and losses here, with the most spectacular successes or failures often getting a lot of attention - a kind of trophy show on the Internet. These posts are often written with a sense of irony or self-deprecation that characterizes the WSB subculture. Terms like "YOLO" (You Only Live Once) and "Diamond Hands" (the refusal to sell stocks despite heavy losses) originated here. But WallStreetBets really became famous in 2021 with the so-called GameStop short squeeze. Members of the community discovered that hedge funds had taken large short positions on GameStop (GME) stock. Organized through posts and discussions on WSB, they bought the stock in bulk, causing the price to rise dramatically and forcing the hedge funds to take billions in losses. This collective buying frenzy was seen as a kind of backlash against established financial institutions. But Gamestop is a problem case, so there were reasons to short it. Declining sales and profits weighed on the brick-and-mortar video game retailer, which had few prospects. The events sparked a broad debate about the role of social media in financial markets, regulation, and the power of retail investors. The WSB community has been accused of facilitating market manipulation or luring inexperienced investors into high-risk strategies. Financial regulation has intensified since the GameStop event, particularly with regard to the link between social media and stock market activity. Despite the controversy, WallStreetBets remains one of the most influential subreddits. This shows how powerful digital communities can be in traditional areas like financial markets.
Reddit's Segments
Let's turn to segments. The majority of Reddit's revenue comes from advertising. The company offers advertisers the opportunity to promote their products and services through various ad formats. We know a similar concept from Facebook, Twitter or Google. Promoted posts, which look like normal posts and are seamlessly integrated into the user interface, play a central role. These ads appear in users' feeds and are often tailored to specific audiences based on the interests of subreddit communities. The platform operator's knowledge of its users is a competitive advantage in the advertising business. In addition, Reddit uses programmatic advertising, allowing companies to buy ad space automatically. A key benefit for advertisers is the ability to target specific audiences. Because Reddit offers a variety of topic-specific communities (subreddits), companies can target users who are interested in their industry or products. This increases the relevance and effectiveness of advertising. In addition to advertising revenue, Reddit also generates revenue from other businesses. An important part of this is Reddit Premium, a subscription service that offers users ad-free browsing and additional features such as monthly Reddit Coins. These coins can be used to reward posts or comments, which is part of the community interaction. Partnerships, data analytics and occasional merchandising sales are additional revenue streams.
Source: Form 10 Reddit Q3/2024
Advertising still dominates today, accounting for 90 percent of total revenue. But other revenues are catching up. They will grow 6.6 times by 2024, while the advertising business will "only" grow by almost 46 percent.
Reddit's market and competition
The advertising market is not easy, mainly because it is cyclical. However, online advertising, where a company like Reddit operates, provides a tailwind. Specifically, Reddit operates in the social media, online communities and digital content market. It is characterized by a high level of dynamism, intense competition and a strong dependence on active user participation. Compared to other platforms such as Facebook, TikTok or YouTube, Reddit differs in its community-centric approach. Instead of relying on individual social networks, Reddit organizes its users' interactions into topic-specific subreddits that cover a wide range of interests and niches. A central aspect of this market is the monetization of user activity, primarily through digital advertising. Reddit occupies an important position here, offering advertisers the ability to target specific audiences organized into subreddits. However, this market is highly competitive, with many platforms using similar advertising models and vying for the attention of users. As a result, the focus is on user metrics that drive the success of both the advertising and platform businesses. In addition to advertising, other revenue streams such as premium subscriptions and virtual goods also play a role. They provide more stability and diversification of revenue. However, platforms like Reddit still need to constantly innovate to remain competitive and retain both users and advertisers over the long term. The market itself is being driven by technological advances, the increasing use of mobile devices, and the growing importance of online content, creating new opportunities but also risks.
Reddit also has several significant competitors in the social media and online communities market. The most important of these are Facebook (Meta Platforms), X, TikTok, Discord, and specialized forums such as Quora. They all provide opportunities for content sharing and community building, but they take different approaches and have different audience strategies. Facebook and X, for example, are designed for personal networking and real-time interaction. Users primarily connect with friends, family, or followers and consume content prioritized by algorithms based on social connections. Reddit, on the other hand, is more topic-driven, encouraging anonymous interactions in subreddits that are often built around specific interests or niches. This anonymity is what sets Reddit apart from many other social networks and allows for freer and more authentic discussion. TikTok, on the other hand, focuses on the creation and consumption of short, algorithmically curated video content, making it particularly appealing to a younger audience. Reddit, on the other hand, offers a wider variety of content formats, including text posts, images, videos, and links, and has a more developed discussion culture. This can also be found on Discord, another community-based network where users can organize themselves into thematic groups. However, its focus is more on real-time communication via text and voice channels. There are other differences from Discord: Reddit is characterized by its asynchronous nature, where users can consume and respond to posts and discussions at any time without the need for immediate interaction. Last but not least, Quora also provides a platform for knowledge sharing that is comparable to Reddit in terms of the quality of answers. However, Quora is more focused on expert opinion and personal profiles, while Reddit's diversity and anonymous discussions are more broad-based.
As you can see, the competition is fierce and each of the players can make their platforms more competitive, which can be an opportunity but also a risk. In principle, however, everyone benefits because they serve a growth market, namely the digitalization of social networking and communication.
Reddit's international expansion
Reddit is active worldwide and has a large user base in many countries, although its origins and the majority of its users are in the US. In recent years, it has worked hard to strengthen its international presence by adapting content and features to different markets.
Source: Reddit Form 10-Q, September 30, 2024
In addition to the U.S., Reddit now has a strong presence in Canada, where similar topics to those in the U.S. are discussed. The number of users in the UK is also growing, with many participating in discussions on UK topics and local subreddits thriving. Reddit is now available in emerging markets such as India and Brazil, as well as Australia and many European countries. The same is true for the Asian region. However, the challenge is always to meet the needs of users with localized content to further grow the community. So far, this has been quite successful, as evidenced by the financials.
Reddit's latest quarterly numbers from September 2024
The last quarter also brought impressive numbers. Both user numbers and revenue increased significantly. The latter increased by 68 percent to $348 million. The growth driver was advertising revenue, which increased by 56 percent. Other revenues also multiplied year over year to $33 million. Reddit's monetization is in full swing and promises economies of scale. The bottom line is that the numbers confirm that the platform continues to grow and successfully expand its user base.
Sources: Reddit financials, StocksGuide
It is also worth noting that Reddit is now growing profitably at a rapid pace. In the third quarter of 2024, a respectable net profit of $30 million was achieved, after losses in the previous year. This is an important milestone that builds confidence in the sustainability of the business model. It also shows investors that Reddit is willing to pursue a profitable growth path early on, rather than grow at any cost.
In addition, the strong cash flow bodes well for the company's financial health. It provides room for future investments and should reduce further dilution through capital increases. At EUR 70 million, free cash flow in the third quarter was already more than twice as high as net income for the quarter. This was mainly due to high share-based compensation expenses. These amounted to more than USD 83 million in the third quarter alone and weighed heavily on earnings, but did not result in an outflow of cash. Adjusted net margin for the quarter was well into positive territory at 8.6%. Furthermore, Reddit is virtually debt-free, with more than $1.7 billion in cash, cash equivalents, and marketable securities such as U.S. Treasuries at the end of the third quarter of 2024.
Source: Reddit financials, StocksGuide
Overall, Reddit appears to be on track to continue growing its business and establishing itself as a leader in the digital advertising and community landscape in a highly competitive market. This is particularly evident in the user metrics.
Reddit user metrics
They show that the number of daily active users in the U.S. business has grown particularly strongly this year, up 51 percent to 48.2 million. The international business is slightly larger, with 49 million users. However, at 44 percent, growth here was slightly lower than in the U.S., although it was also at a high level.
Source: Reddit User Metrics 9M-2024, Q3 press release
But since revenues grew more than user metrics, another explanation lies in the increase in average revenue per user, or ARPU. And here we can see that monetization is progressing successfully - especially internationally. Although ARPU in the US, at $3.58 in the first three quarters, is still well above that of the international business ($1.32), the gap is closing. The US business recently grew by 12 percent, while the international business increased its revenues by 16 percent. Of course, this is nothing compared to Meta Platforms. Meta reached an ARPU of $44.60 in 2023. At the same time, Meta Platforms itself started at $5 in 2011. If Reddit can achieve something similar, a tenfold increase in ARPU could be possible - or so the fantasy goes.
Reddit Stock Forecast 2024
Reddit has only provided a forecast for the fourth quarter of 2024. This assumes continued growth. Specifically, revenues are expected to be between $385 million and $400 million and adjusted EBITDA between $110 million and $125 million. In addition to the $873 million of revenue generated in the first three quarters, annualized revenue of up to $1.27 billion would be possible. This represents 58% annual revenue growth (2023: 21%). Adjusted EBITDA is forecast to peak at up to $268 million for the full year.
The company cautions that these projections are subject to risks and uncertainties that could cause actual results to differ. Overall, however, the outlook shows that Reddit is confident about the coming months and is on a stable growth path, both in terms of user numbers and monetary metrics.
Source: Reddit revenue and earnings forecasts through 2029, StocksGuide
Analysts also see strong growth potential. However, the recent high revenue growth of over 50 percent this year is likely to slow rapidly to 20 percent in 2028. Annual revenues of more than three billion US dollars could then be realistic. However, the business model allows for high economies of scale, which can lead to disproportionate profit growth. In the current year, 2024, a visible loss of more than $760 million is still expected, partly due to the expensive IPO. But by the next year, 2025, it should be in the triple-digit millions. In 2028, analysts expect a figure of over $660 million. In most cases, net profit growth is expected to exceed 50 percent.
Key metrics for Reddit stock from the HGI analysis
The HGI score for Reddit stock is currently 12 out of 18, indicating positive overall growth potential. As the maximum score was not reached, there are weaknesses. But first the positive.
Source: HGI score of Reddit stock, StocksGuide
On the positive side, the gross margin is very high at 88%. This is explained by the business itself and is typical for digital platforms like Reddit, which rely primarily on software, data and community management to provide their services. Platform operators typically have low direct production costs, especially those based on user-generated content. As a result, Reddit does not have to make large investments in content creation itself. Instead, it focuses on providing the infrastructure to host and moderate that content. In addition, Reddit generates a large portion of its revenue through digital advertising, which also contributes to high margins. Digital advertising products require no physical production costs and are based on software and data analytics.
Finally, Reddit receives the maximum score of three points for its very high gross margin according to the strategy criteria. The leverage ratio is also very low at 0.01, which speaks for excellent financial stability and is rewarded with three out of three possible points. Another positive signal comes from the Rule-of-40 score, which is a good 58 percent, indicating a very strong performance in terms of sales growth and profitability. Last year's sales growth of 49 percent is also impressive. According to analysts, it should also remain high in the long term. However, there have been large fluctuations in recent years, with annual sales growth ranging from 38 percent to 112 percent. But all at a high level.
Despite the good figures, there are also weaknesses. For example, the PEG (price/earnings to growth) ratio. It is currently not calculable due to losses, which means that it is not comparable with the ratio of valuation to growth, and is also awarded zero points. However, the EV/Sales multiple of 21 indicates that the stock could be expensive. In summary, the HGI score shows that Reddit has strong growth momentum, but there are also some uncertainties regarding valuation and future growth. Nevertheless, the stock has good arguments that make it an attractive candidate for growth strategy investors. As far as growth is concerned, there could still be a lot of potential in the future. However, Reddit will have to expand its business model in all directions. It remains to be seen what the other social media giants will do when they realize that Reddit is becoming too successful.
Despite good key figures, there are also weaknesses. For example, in the key figure PEG (Price/Earnings to Growth). It is currently not calculable due to losses, which means a lack of comparability with regard to the ratio of valuation and growth and is also given zero points. However, the EV/Sales multiplier of 21 shows that the stock could be expensive. In summary, the HGI score shows strong growth momentum at Reddit, but there are also some uncertainties regarding valuation and future growth. Nevertheless, the stock has good arguments that make it an attractive candidate for growth strategy investors. In terms of growth, there could still be a lot of potential in the future. However, Reddit will have to roll out its business model in all directions to achieve this. It remains to be seen what the other social media giants will do when they realize that Reddit is becoming too successful.
Valuation of Reddit stock
The valuation of Reddit shares already prices in a certain growth potential. This alone explains the sales multiple of 23, but it could be justified in view of the expected growth of 20 to 50 percent per year. Especially since high economies of scale are possible. It is not for nothing that analysts expect significantly disproportionate profit growth in the coming years.
Source: Reddit stock valuations, aktien.guide
However, even a potential profit of over 600 million US dollars in 2028 only partially justifies the current valuation of over 24 billion US dollars. So even after 2028, high growth must be delivered for the share price to continue to rise. Positive surprises are therefore needed to achieve an attractive return. And these could lie above all in a further development of the business model. This is not just about greater monetization through advertising or geographic expansion. It is primarily about expanding the ecosystem. If you look at the big picture, a market capitalization of $24 billion is of course nothing compared to Meta Platforms. But it also shows where the journey can lead.
Conclusion on Reddit stock
Reddit is at an exciting point as a company and as an investment. It combines the power of millions of active users with a business model that is perfectly aligned with the trends of the digital age. The platform benefits from the growing importance of authentic, user-generated content and offers advertisers the opportunity to address target groups precisely and efficiently. Few succeed at this as well as Reddit.
With a solid financial base, high profitability and a clear growth strategy – both in its existing markets and through international expansion – Reddit has the potential to establish itself as a leading player in the digital communities and advertising platforms sector over the long term. For investors who want to back innovative strength, community-driven network effects and the internet's major growth areas, the stock could therefore be an interesting opportunity. However, at a not insignificant price. A revenue multiple of 20 is not cheap. It will take years before the fundamental key figures justify this. But $26 billion is ultimately not enough for the potential that could lie dormant behind the stock. The international expansion and the ongoing monetization represent a concrete multiplication potential. If Reddit succeeds in doing what Meta Platforms has done, the capitalization could increase significantly again. In doing so, the competition should never be overlooked, as they may launch similar products or align their sites with Reddit's
.
Source: Analysts' opinions and target prices for Reddit shares, StocksGuide
The majority of analysts see the stock as a buy. They believe in Reddit's equity story – and investors are also optimistic, as the share price performance and valuation show. However, there are also some skeptics who see the stock more as a holding position. One analyst even advises selling. The average price target is 20 percent below the current price. Future growth rates and, above all, the change in profitability indicators will show which way the journey is headed.
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The author and/or persons or companies associated with the StocksGuide own or may own shares in Reddit. This article represents an expression of opinion and not investment advice. Please note the legal information.
