There was some skepticism about Reddit's initial public offering earlier this year. Some investors weren't sure how a 19-year-old, unprofitable social media company could stand out in a market dominated by giants like Meta Platforms. But Reddit stock has flipped the script.
Shares of the user-forum website operator soared 40% following a strong third quarter earnings report in late October. With further gains in the weeks since then, Reddit stock is now up more than 250% from its March listing price of 34 and 185% from its first-day closing price. It is a top-performer among recent IPO stocks tracked by IBD.
Reddit's user growth is surging, helping build momentum for advertising sales. It also has a new revenue stream in AI content licensing. The San Francisco-based company swung to a third-quarter profit when Wall Street analysts' consensus projected a loss.
"There were a lot of people who understandably were skeptical of Reddit and the IPO, just given the history," Third Bridge analyst Scott Kessler told Investor's Business Daily. "But it does seem that they have seized upon something. Now the big question that people have is how sustainable is this momentum?"
Reddit Value Overtakes Snap, Pinterest
Reddit's third quarter report showed a 68% jump in revenue to $348.4 million, while earnings reached 16 cents per share, compared to estimates of a 7 cent loss.
The report sent Reddit stock soaring, with its market capitalization now at $23 billion. Reddit's market cap is now ahead of social media rivals Pinterest and Snapchat parent Snap. That's despite both those companies having significantly larger projected annual revenue than Reddit.
The love for Reddit stock marks a twist for a platform founded only a year after Facebook, but with a much bumpier road to a public offering than Mark Zuckerberg's tech titan.
Reddit features a lively trove of 1 billion posts across 100,000 communities. But its early history was marked by debates about content moderation, leadership and ownership changes.
The company resisted advertising and acknowledged in its February IPO filing that it did not begin "meaningful monetization efforts" until 2018. Reddit's IPO filing showed a $91 million loss for 2023, underscoring the debate about whether it could stand out in a digital advertising market dominated by Meta, Google-parent Alphabet and Amazon.com.
But those monetization efforts are clearly accelerating. Reddit is projected to reach $1.3 billion in sales this year, according to FactSet analyst consensus, compared to $804 million in 2023 and $668 million in 2022.
Google, Translation Boost Users
Daily active users for Reddit surged 47% year over year to reach 97 million last quarter, compared to 15% user growth the company saw in the third quarter of 2023.
Google search is giving the platform a boost. Following Reddit's Oct. 29 earnings report, Chief Executive Steve Huffman told analysts that Reddit is the sixth most Googled word in the United States so far in 2024.
Reddit is also seeing strong international growth, which Huffman credited in part to AI-powered translation that allows Reddit content to be read by users in a wider range of countries.
Ad Sales Jump 56% Year Over Year
Kessler of Third Bridge says the media attention of an IPO could helped boost Reddit's profile. Before that, there was the rise of the WallStreetBets Reddit community that helped make the platform more of a household name.
"Generally speaking, advertising follows audiences," Kessler told IBD.
Beyond that, Reddit has touted investments into its advertising offerings that make it easier to develop campaigns and target audiences. It has also improved its reputation among ad-buyers.
"In years past, advertisers shied away because of concerns about content moderation and brand safety," Debra Aho Williamson, chief analyst at Sonata Insights, told IBD. "But Reddit has done a very good job of cleaning up its platform and creating safer spaces for ads to appear in."
Revenue from selling advertising increased 56% year over year to $315 million in the third quarter.
Reddit Stock: What About AI Revenues?
Reddit has also captured investor attention through its deals with companies such as Google and OpenAI to license its user content to train AI models. Reddit's "other revenue" category rocketed 547% to $33.2 million for the third quarter.
But Reddit Chief Operating Officer Jen Wong told analysts following the Q3 report that the company has "limited visibility" into future deals.
Bernstein analyst Mark Shmulik estimates that Reddit's data licensing revenue has a profit margin of more than 90%. But, he said in a client note following the Q3 report, he is not forecasting a "meaningful ramp" in data licensing for Q4.
Does Reddit Have A Google Risk?
There are challenges ahead for Reddit. Analysts project both sales and user growth will slow from the current heights against tougher year-over-year comparisons.
Similar to previous quarters, more than half of Reddit's daily active users in the third quarter were "logged-out users," meaning they landed on the website from elsewhere on the web, including Google search. In October, Reddit trailed only Wikipedia and Amazon.com as the top site for visibility in U.S. Google search results, according to estimates from Sistrix.
That, however, is bringing greater scrutiny to Reddit's reliance on Google for attracting users.
"Google could change its practices or how it uses or displays content from Reddit," Williamson told IBD. "And with Google's search business facing pressure from AI answer engines like ChatGPT, Reddit's reliance on getting traffic from Google searches could be a risk factor."
Huffman was asked about Reddit's Google risk on the company's earnings call. The Reddit chief executive acknowledged that the company has long had a "symbiotic relationship" with Google and that its algorithms can "giveth and taketh away."
But he believes the Google-directed traffic can help establish relationships with users.
"At the end of the day, Reddit has great content," Huffman said. "It has answers to questions. It has advice and perspectives that people are looking for. And that's what Internet consumers want, whether they're coming directly to Reddit or finding us through other means."
Reddit Second In Internet-Content Group
Reddit stock trails only Meta Platforms among the top ranked stocks in the 83-stock Internet-Content group tracked by IBD.
Its IBD Composite Rating is 95 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Reddit stock is also on the premier IBD 50 list, as well as IBD's IPO Leaders and Tech Leaders lists, as well as SwingTrader.
