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Reddit Stock: Catch a Rising Social-Media Star

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Niche social-media platform operator Reddit (NYSE:RDDT) isn’t new, but it’s new to Wall Street as the company just filed for its initial public offering (IPO) in February and debuted for public trading in March. Fast-forward to May 7, and all eyes were on Reddit to see how it would fare in its first post-IPO earnings report.

It’s amazing to see this happen, as Reddit was basically a secret online hideout for years. Or at least, it was secret until meme-stock traders thrust it onto the front page of the financial-news media in 2021.

Reddit users, called Redditors, made stock-market stars out of Gamestop (NYSE:GME) and AMC Entertainment (NYSE:AMC) a few years ago. Now the spotlight is turned back on Reddit, and one can hope that the social-media platform can focus on profits instead of memes.

Sharp rally, sharp criticism

It can be debated whether RDDT stock is actually a meme stock. However, the stock had meme-like qualities upon its public debut for trading, as it rallied 48% on IPO day.

Naturally, some onlookers and commentators questioned whether Reddit stock’s price move was justified. The company’s full-year 2023 sales increased 20% to $804 million versus $666.7 million in 2022. However, Reddit reported a $90.8 million net earnings loss in 2023.

Furthermore, the company has failed to produce a profitable year since it launched in 2005. Thus, in consideration of Reddit’s less-than-ideal financial track record, some commentators weren’t particularly enamored with it.

For example, Bernstein analysts led by Mark Shmulik initiated their coverage of Reddit stock with an Underperform rating.

“If Pinterest and Snapchat continue to struggle to live up to their potential with higher engagement/commercial intent, better ad tools… what hope does Reddit have with their worst-in-class engagement, anonymous user base, and NSFW (not safe for work) content?” the Bernstein analysts queried in a note.

Moreover, they called RDDT an “institutional meme stock” and expressed skepticism about the alleged promises of “profits just around the corner.” However, I can’t confirm whether Reddit or anyone/anything else actually promised around-the-corner profits.

It’s hard to deny that Reddit appeared richly valued upon its public debut, at least according to one traditional metric. Per CNBC, using the company’s market capitalization at its IPO, it had a price-to-sales (P/S) ratio of around 8. For comparison, Pinterest (NYSE:PINS) had a P/S ratio of 7.5 while Snap’s (NYSE:SNAP) was 3.9.

Reddit’s revenue run-up

Thus, Reddit had a lot to prove with its first post-IPO earnings report on Tuesday afternoon. Undoubtedly, both the bulls and the critics sought clarity on its fundamentals and evidence that it’s financially viable.

Reddit stock jumped 13% in after-hours trading, so there’s a clue that it delivered some fodder for the bulls. Whether the company was actually profitable in the first quarter is a matter for discussion — but more on that topic in a moment.

First things first. In Q1, Reddit increased its daily active “uniques” (a measure of visitor traffic) by 37% year over year to 82.7 million. Therefore, it certainly appears that Reddit’s social-media platform was highly active in the first quarter.

Activity can lead to advertisement revenue, and Reddit’s ad revenue grew 39% year over year to $222.7 million. Moreover, the company’s total revenue increased 48% year over year to $243 million; this result beat Wall Street’s consensus estimate of $212.8 million.

Was Reddit actually profitable?

Now for the bottom-line stats (drum roll, please). The skeptics would surely point out that Reddit incurred a first-quarter net earnings loss of $575.1 million. On the other hand, the company was quick to point out that this net loss was “driven by IPO expenses.”

More specifically, “Stock-based compensation expense and related taxes were $595.5 million.”

Hence, if we choose not to count the one-time IPO-related expenses, it might be posited that Reddit had a net profit for the quarter.

I’ll admit, I’m engaging in some mental gymnastics here. For what it’s worth, there’s another bottom-line metric that could be cited as an alternative to Reddit’s net income/loss.

In its quarterly press release, the company emphasized that it had its “first profitable Q1 on an adjusted EBITDA basis.” In numerical terms, Reddit recorded Q1-2024 adjusted EBITDA of $10 million, versus an adjusted EBITDA loss of $50.2 million in the year-earlier quarter.

Let’s not get bogged down in semantics. Regardless of whether Reddit should be considered first-quarter profitable or not, it undeniably recorded robust user traffic and revenue. Thus, while the pundits argue about what’s real and what’s only a meme, feel free to add a few Reddit shares as a speculative bet on an established but rising social-media star.