The forums on Reddit (RDDT -1.81%) have made it one of the sensations of the social media world in recent years. Many of the forums provide information and help users answer questions, making them an excellent resource.
The company capitalized on this popularity when it launched its initial public offering (IPO) in March. Since then, Reddit stock has risen by more than 150%. Unfortunately for new investors, it may be unclear at first glance whether such gains are a reason to buy it, or whether they missed the boat and should avoid the stock.
Determining the right course of action requires a closer look at Reddit's business and its financials.
Understanding Reddit as a business
Reddit describes itself as a "community of communities." Users build and participate in social media communities built around hobbies, interests, or passions. The site has grown to more than 100,000 active communities, which draw more than 97 million daily active unique users to its forums. From these communities, Reddit claims to be one of the largest sources on the internet for information.
Like other social media stocks, the company leverages its spaces to earn revenue from digital advertising, its largest revenue source. It also earns revenue from premium subscriptions and data licensing. These sources should foster company growth as more users turn to the site.
Furthermore, its approach of creating and operating forums gives it a competitive advantage in the social media space. Social media alternatives like X or the ones run by Facebook parent Meta Platforms are not designed to compete with such a site. Competitors are unlikely to surpass Reddit by building a competing site due to its already massive following.
That market leadership bodes well for the stock. Shares came on the market at $34 per share in March. Although the stock gained little traction initially, it has surged in recent weeks, leading to the aforementioned increase of over 150% over its short history.
Reddit's financials
However, one has to ask whether the stock price has moved ahead of its financials. In the first nine months of 2024, Reddit reported revenue of $872 million, an increase of 57% from the same period in 2023. During that time, its costs and expenses increased by 113%. Consequently, its loss for the first three quarters of 2024 came to $555 million versus $106 million in the year-ago period.
Nonetheless, most of that spending occurred in the first quarter as stock-based compensation increased around the time of the IPO. With that expense largely in the past, Reddit earned a net income of $30 million in the third quarter, indicating its financial picture is better than the nine-month financials might imply. To that end, analysts forecast positive net income in 2025, along with a predicted 30% revenue increase. Although that still points to rapid growth, investors will also have to contend with a slowing growth rate, which might sour investors on the stock.
Its price-to-sales ratio (P/S) is 17, a level that has risen along with the stock price; its forward P/E of 72 also indicates the stock has become expensive. Such metrics may convince investors that they have missed out on this bull market in the stock.
Is the stock still a buy?
In the current environment, Reddit stock is likely a buy for long-term investors.
Admittedly, the rising price and valuations should encourage investors to turn cautious. That likely calls for new investors to take a dollar-cost averaging approach since the rapid surge in the price could spark a near-term pullback.
However, few can question whether Reddit's approach to social media resonates with users and investors alike. That should prompt significant revenue increases and, likely, sustained profitability.
