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About Reddit

With Instacart recently kicking off a fresh initial public offering (IPO) season, other companies are piling into the fold with the opening of the capital markets and while there have been rumors surrounding companies such as payment processing company Stripe, specialized communications and messaging platform Discord and others filing to become publicly traded, social media platform Reddit Incorporated has proven the rumors to be exactly and utterly true, as they are now indeed a publicly traded company.

R/yay, am I right?

While this is exciting and many opportunities are likely to emerge from this influx of major IPO interest, let’s lean more into Reddit itself, as it is a ubiquitous platform that is enjoyed by many, but we are still incredibly unexcited about this company’s basic business model.

Let’s break this down a little bit.

For those that don’t know about Reddit, it is basically a gigantic message board that is categorized into thousands upon thousands of different topics (called subreddits), some serious, some not, acting as a place where people can get answers to their ever so pressing questions, or where visceral debates are had by the world’s keyboard warriors, or, well, practically anything anyone wants to talk about is game.

Sort of unclear, right?

That’s because Reddit is deep, vast and sort of whatever you want to make of it, at the end of the day. 

For example, let’s say I wanted to know if anyone at my university has taken a certain professor for a certain economics course I was forced to take, and if so, would they recommend them or perhaps suggest that I try taking the course with another professor. 

I could simply make an account in a matter of seconds, type my inquiry and send it specifically to the r/utaustin thread and await answers, opinions and probably some stuff that I didn’t even want to know in the first place.

Any subject, any time, Reddit is an undeniable platform for the masses.

Regarding the company’s business model, social media companies in general (that is, even the wildly successful ones) operate within an extraordinarily competitive and unforgiving landscape, as trends fade and pass and companies such as Reddit, Snapchat, Meta Platforms (Facebook, specifically), Twitter (or X, whatever) have to adjust quickly, and some of these companies (Meta largely excluded) struggle to even turn a (net) profit through their operations, as these companies rely heavily on advertising dollars as revenue, and recent history shows that this can be a rather frothy and sometimes unreliable revenue base, as when times and teams get lean, so do their advertising budgets.

And a company such as Reddit, with little to no revenue stream diversification needs as much stable revenue coming in as possible.

Aside from ad revenue, Reddit also generates revenue through the sale of its gold coin currency, which users can gift to one another, where initially obtaining said currency costs actual money, which candidly seems like a really silly waste of money, but people do it so what do I know?

Additionally, it is far from surprising that the company also offers users different premium-style packages, the primary advantage being an ad-free user experience, which is extremely common on the aforementioned scaled social media platforms.

Now that some of the groundwork has been laid pertaining to newly public Reddit, it would make sense to get a better feel for the company’s financials, however, right before rolling up our sleeves, a word of warning is in order for freshly publicly traded companies.

Typically, on the first day of a company’s shares trading, the stock price goes up as excitement and usually enthusiastic buyers dive headfirst into the company’s shares (as was the exact case with Reddit, by the way), however, recent history hasn’t shown this to be the most prudent investment strategy, and while I am not in the business of specifically predicting stock prices, as Reddit (NYSE: RDDT) could triple in the next week for all I know, the excitement tends to wane and with that, its share price in the intermediate and long-terms.

Therefore, from my perspective, even if I do end up considering Reddit’s shares to be a “buy,” I am much more inclined to wait for the balloon to deflate before more than likely overpaying for a slice of the r/cake.

That’s my soapbox for the day and I am sticking to it.

Reddit’s stock financials

First things first (I’m the realest), according to its market capitalization, Reddit is a $7.76 billion company with an associated share price of $47.84 along with not a price-to-earnings (P/E) ratio in sight but a negative earnings per share (EPS) metric of -0.57 and, of course, no annually issued dividend offered to its shareholders, probably because it cannot afford to cover a dividend, even a rather tiny one.

Ecclesiastes once said that there is nothing new under the sun, and I can assure you that he was onto something, as we didn’t expect for a single second that Reddit would’ve had a price-to-earnings ratio attached to its name, also expecting this company to not have any positive earnings per share to report, as this company, even as established and popular as it is, is likely burning through a good deal of cash (albeit probably still growing its revenues, which is sort of the Catch-22) and isn’t poised to be (net) profitable for this primary reason. 

This isn’t necessarily the end of the world, but it is sort of a harsh truth and we do have a little bit of apprehension in checking this company’s revenue-to-cash flow burn, which we will still do momentarily.

Nevertheless, peering over the company’s balance sheet, Reddit’s executive team is tasked with handling, managing and prudently deploying just under $1.6 billion in terms of total assets along with $156 million in terms of total liabilities, which undoubtedly lends us some much needed initial comfort, as this company has quite the asset coverage to not only service its minimal outstanding debts and other liabilities, but also clearly has the dry powder to continue funding growth for quite some time.

This is frankly fantastic.

Moving right along to the condition of the company’s recent revenues (as found on the income statement), starting off in 2020, it can be found that Reddit’s annual revenues have indeed been growing, likely with its user base and through acquiring more advertisers over the years, particularly growing off of a base of $229 million in 2020 to its latest reported revenue figure of $804 million, as reported in 2023.

Nearly quadrupling one’s revenues within this relatively short span of time is impressive, even for Reddit, however, let’s address the more pressing matter of just how much this company is jettisoning in terms of cash in achieving these revenues.

Specifically, with reference to the company’s cash flow statement, Reddit’s total cash from operations (also as measured during and between 2020 and 2023) have actually not been nearly as terrible as we had initially predicted (boy do I love being wrong sometimes), reporting its largest total cash from operations loss of -$130 million in 2021, likely due to reinvesting heavily throughout the brunt of COVID-19, which was technically covered by its revenues, although this still doesn’t negate the fact that Reddit is, at the end of the day, still a money-losing operation, but just not at a rate that was as bad as we thought.

Happy surprises.

Reddit’s stock fundamentals

Now onto the profitability front in its entirety and how the company measures up against the competition, according to TD Ameritrade’s platform, Reddit’s trailing twelve month (TTM) net profit margin sits at -11.30% to the industry’s (not so) comparable average of 22.07%, which, while not an objectively desirable outcome, sensible given the context and financial backdrop of this firm, primarily as it relates to the company’s not-so-diversified gamut of revenue sources, as adding some more stable revenue sources into the mix can act as a way to better solidify and increase its TTM net profit margin, hopefully also finding some distinct ways in which it can cut out some unnecessary costs, perhaps by use of artificial intelligence (AI), among other tools and methods.

Lastly, with respect to the company’s TTM returns on both assets and investment, Reddit once again has some work to do, but again, what’s new, as, for example, the company’s TTM return on assets is shown as (also on TD Ameritrade’s platform, by the way) -5.68% to the industry’s listed average of 18.42%, however, we don’t give these metrics as much credence, as, say, its prevailing TTM net profit margin at times because this is still a pretty young company (founded in 2005) and it will naturally take some time for this company to garner some better, more industry aligned returns, and with all of the moving parts within this company, I wouldn’t count on this happening a great deal within the next year or so, but rather a decade or so from now.

Of course, we would entertain being wrong on this front.

Should you buy Reddit stock?

Most of my friends use Reddit and I just don’t get it.

And no, I didn’t mean to rhyme, but, hey, it’s fun sometimes.

Ok, sorry for all of the unnecessary chit and chatter. Let’s just get back to the company related to this matter.

This is a very popular message board platform and I do think the platform is taking the proper steps in becoming a serious, publicly traded company.

Additionally, its recent revenue figures have been growing at an impressive rate, its balance sheet is in more than excellent condition, its total cash from operations have experienced a solid amount of bleed, however, with respect to the company’s corresponding revenues and cumulative assets, Reddit’s executive management has struck a great balance in maintaining outpaced revenues relative to its negative cash flows.

Candidly, our biggest gripe with this company’s stock (NYSE: RDDT) is the fact that it recently became a publicly traded stock, as my gut typically tells me (and history, too) that piling into a new security during a period of copious amounts of hype and excitement isn’t the best idea, and my gut in this respect is pretty much always right.

Buying high and selling low isn’t exactly an effective investment strategy, to say the least.

Therefore, right now, I would offer this company’s stock a “sell” rating.

However, I will say that, given the financials we’ve discussed and analyzed in this stock analysis article and the promise of Reddit continuing to continue diving into advertising and the potential behind this firm and the deployment of artificial intelligence, once (or if, I suppose) the IPO bubble slowly bursts, I’d be comfortable offering this company’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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