Shares of social media giant Reddit (RDDT -1.81%) have been on a rocketship since its IPO in March. The stock debuted at $34 per share, and closed the day up 48%, but that was nothing compared to what was to come.
On Dec. 9, shares hit a jaw-dropping 52-week high of $180.74, a massive 432% increase from its IPO price. The stock could go even higher, especially since the fourth quarter is historically when Reddit sees an increase in consumer usage and revenue.
Does that mean now is the time to scoop up shares? Before deciding to buy, let's first assess whether Reddit makes a worthwhile long-term investment. If so, then we can consider whether now is the time to purchase shares.
Reddit's user growth
Reddit stock's meteoric rise is the result of the social media company's phenomenal business performance. Despite being nearly 20 years old, the company is still seeing growth in usage of its website and app.
In the third quarter, Reddit's daily active uniques (DAUq) increased 47% year over year to a record 97.2 million. DAUq measures the number of people who visit Reddit at least once in a 24-hour period. The company uses DAUq to measure its active user base.
About half the company's users reside in the United States. To expand its audience, Reddit management is focused on growing its presence in international markets. For example, it's using artificial intelligence to translate its content into other languages. Those efforts are bearing fruit. In Q3, daily active users outside the U.S. grew 44% year over year.
Reddit's financial performance
Reddit's user growth translated into strong sales. Like many of its social media peers, the company generates the bulk of its revenue from advertising.
Marketers want to advertise where they can reach a large audience. That includes Reddit, since it's one of the top 10 most visited websites in the world.
The company is paid based on the number of people who are shown an ad. A rising user base means ads are exposed to a larger audience, translating into more revenue for Reddit. This led to incredible sales growth.
| Quarter | Revenue | YOY Change |
|---|---|---|
| Q3 | $348.4 million | 68% |
| Q2 | $281.2 million | 54% |
| Q1 | $243 million | 48% |
Data source: Reddit. YOY = year-over-year.
The quarterly increase seen in its change to year-over-year revenue indicates that Reddit's sales growth is accelerating. This trend could continue into the fourth quarter.
The company anticipates Q4 revenue in the range of $385 million to $400 million, up from 2023's $249.8 million, and continuing its streak of double-digit sales increases. Reddit surpassed its projected revenue targets in the past two quarters, so it's possible Q4 income will come in higher than $400 million.
Rising revenue isn't Reddit's only financial bright spot. The company achieved its first profitable quarter in Q3. Net income reached $29.9 million, compared to a net loss of $7.4 million in 2023. This is an impressive result, considering how quickly Reddit reached profitability after its IPO.
Many tech companies operate as public companies for years before making a profit. For instance, fellow social media firm Snap exited Q3 with a net loss of $153.2 million, and its IPO was in 2017.
Another strength is Reddit's balance sheet. The company exited Q3 with total assets of $2.2 billion, with $1.7 billion of that in cash, cash equivalents, and marketable securities. Contrast that to total liabilities of just $194 million.
Making a decision about Reddit stock
Reddit's phenomenal growth and strong financials demonstrate that it's a company worth investing in. The key question is whether now is a good time to buy its stock.
To help assess this, here's a chart comparing its price-to-sales (P/S) ratio to other social media companies'. This metric tells you how much investors are willing to pay for a dollar's worth of sales.
Data by YCharts.
Reddit's P/S ratio is far greater than the P/S ratios of others in the social media space. This suggests that Reddit shares are currently overvalued.
Arguably, Reddit's future fortunes could be superior to competitors' -- for instance, its ability to reach profitability years before Snap. Its revenue and user growth have been impressive, and that can warrant a higher valuation as well.
But because shares have soared so much in such a short time, the prudent approach is to put the stock on your watchlist and wait for the price to come down before deciding to buy.
