There was a lot of buzz surrounding the market debut of Reddit (RDDT 7.02%) on Thursday. Trading volume for the popular online discussion forum clocked in at nearly 48 million shares, and among the first wave of public buyers was iconic growth investor Cathie Wood. The Ark Invest co-founder, CEO, and stock picker added a little more than 10,000 shares of Reddit across a pair of her exchange-traded funds.
Underwriters priced the Reddit offering at $34 a share. It was a feeding frenzy. The stock opened at $47, continued to climb, and ultimately closed 48% higher. It's easy to see what Wood likes about the high-profile Reddit platform. Is this her next hot investment? Let's take a closer look at the shiny new debutante that now represents more than $500,000 of Ark Invest's assets under management.
Reddit or not
If you're not familiar with Reddit, you probably know a few people who lean on the massive forum, which has more than 100,000 communities -- or subreddits -- that unite active participants and lurkers alike with a passion for a particular interest. The platform's reach is huge. Reddit draws an average of 73 million visitors a day. Its weekly active unique users clock in at 267 million.
It's also a dream audience for advertisers that can't reach many of its users through marketing missives on other social hubs. Nearly a third of its stateside users aren't on Meta's (META 0.43%) Facebook. More than half of them aren't on X (formerly Twitter). It's also a young and compelling demo market. Reddit's largest age bracket -- 41% of its user base -- is between the ages of 18 and 34. Those users also have money to spend, as 64% of them have a household annual income north of $75,000.
Monetization itself is the challenge and the opportunity. This isn't a visual platform conducive to the video reels and display ads that dominate the experience with other social media stocks. It's largely a text-based message board system, along the lines of Nextdoor (KIND 1.00%), but with a lot more loyalty, personality, and stickiness. A logged-in daily active user spends an average of 25 to 30 minutes on the app or website.
Despite Reddit's engagement, revenue doesn't currently live up to the gargantuan base. Reddit's top line rose 21% to $804 million last year, a figure that breaks down to about $1 a month for each daily active unique user. Divide the revenue into the 267 million active weekly uniques, and that monthly buck of revenue per Redditor becomes a quarter.
Image source: Getty Images.
Putting scalability on the scale
The upside is clearly there. There was a time when Facebook, Instagram, and X were also seen as tough nuts to crack on the monetization front. The trick here for Reddit is to boost its revenue without alienating its contributors. Reddit made headlines for the wrong reason last year when several of its more popular communities were shut down by the independent moderators in protest of Reddit's plan to kill access to the forum through third-party apps. Reddit will need to tread carefully as it stuffs more lucrative but invasive ads into its bloodstream.
Another knock on Reddit is its current lack of profitability. Despite the dream business model of free user-generated content, this isn't as easy as Tom Sawyer tricking his friends into whitewashing the wood fence for him. It currently costs more to run the business than it generates on the top line. More than half of last year's revenue went to research and development costs. Sales and marketing overhead gobbled up 29% of the top line. Reddit's loss narrowed 43% to $91 million last year, but the business has lost money in each of the last four years. Free cash flow remains negative.
This doesn't mean that things will end badly for Cathie Wood and her fellow Reddit shareholders. The stock's $8 billion market cap isn't cheap for a profitless platform fetching 10 times trailing revenue. Meta has a slightly lower top-line multiple, and it's very profitable. However, Reddit is just getting started as a revenue-generating business. It's just starting to scratch the surface of its e-commerce ecosystem. The ceiling is high as it scales and optimizes its ad marketplace. Wood is early and the stock might not be cheap, but those are things that haven't gotten in her way before.