Sunday, 24 November 2024
by BD Banks
One of the hottest tech stocks cruising atop the market these days is Reddit (NYSE: RDDT). The company has seen its share price balloon by over 170% since its March initial public offering (IPO), with much of that rise coming after its late-October earnings release.
The stock’s momentum has pushed it to a market cap of over $24 billion. Such an advancement is reminiscent of the (admittedly far more long-term) rise of mighty Apple (NASDAQ: AAPL). Yes, Apple is a nearly $3.5 trillion company these days, but if Reddit continues to rise in popularity, maybe it could match or even exceed the tech powerhouse’s market value by the end of this decade.
For those who might not be familiar, Reddit operates an online forum in which users post about, and react to, a dizzying number of topics. This neatly fills a niche opened by search engines like Alphabet‘s Google, which can provide results that are quick-hit answers to queries, but typically offer little depth or discussion.
Reddit has taken that simple concept and built a quickly scaling business from it. The company derives revenue from advertising, which is standard in the social media world, but also earns a buck by licensing the data it harvests from users and offering paid “premium” memberships to the user base, among other activities.
Those third-quarter results that got the market so excited revealed that Reddit grew a meaty 68% year over year to more than $348 million. Better, on the bottom line, it flipped to a profit of almost $30 million from a loss of $7 million and change in the year-ago time frame.
Investors got excited about these results, not only because of the hearty growth numbers, but also how they were achieved. Reddit very successfully managed to expand its user base, with daily average uniques (DAUs; better known as daily average users in the broader social media sphere) rocketing 47% higher to over 97 million people.
More impressively, the growth rates and total DAUs in both the company’s native U.S. and abroad were roughly equal. Reddit as a product is scaling admirably well across the planet, it seems. Operational metrics like DAUs matter greatly for advertisers, and all things being equal, a wider, regular user base means more dollars for the site offering the advertising.
Additionally, while average revenue per user (ARPU) didn’t grow as impressively, it still grew by 14% on a global basis to $3.58. Here’s another sweet opportunity for the company, as its third-quarter ARPU on our shores far exceeded that of the international take, by $5.88 to $1.32. As Reddit’s popularity continues to rise abroad, its ARPU should experience a commensurate lift.
Another rather promising revenue source for Reddit is data licensing. Advertising was responsible for the bulk (89%) of the top line in the third quarter, yet the “other” revenue category — containing data licensing — zoomed 547% higher.
While we shouldn’t continue to expect such fat numbers, Reddit has a trove of data thanks to its users, and the licensing of this to train artificial intelligence (AI) is still a business in its infancy. It surely has vast potential for the future.
With those considerable headwinds pushing hard at its back, it’s no surprise that Reddit is such a hot item for investors now.
Yet becoming the next Apple — the dream of many a tech entrepreneur — is like scaling the world’s largest mountain. That $3.5 trillion price tag comes from decades of Apple building brand recognition, to the point where almost everyone on our globe has not only heard of the company, but is instantly familiar with its products.
It also derives from the long-tail success of what was a revolutionary product on its debut — the iPhone — and the development of a lucrative ecosystem built around it. Building a business in these ways isn’t cheap, easy, or quick; it takes plenty of vision and capital — not to mention luck.
So even if we give Reddit a generous stretch of time to reach Apple’s lofty perch, I don’t think it’ll quite scale those heights. Management has done a fine and clever job of locking into business opportunities and leveraging them, but advertisers are fickle and prone to shifting to the Next Cool Thing in order to capture potential customers. Data licensing is a high-potential business, sure, yet it remains to be seen how well Reddit will exploit the opportunity.
Ultimately, Apple will continue to be a monster next to the modest size of Reddit in both the immediate and mid-/long-term future. That doesn’t mean that Reddit is a stock to ignore, though. Quite the opposite — it has attracted the market’s notice for all the right reasons. It’s a future social media giant in the making if it continues on its current path, and well worth consideration as a buy.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Eric Volkman has positions in Apple. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.