Could Reddit Become the Next Meta Platforms?

Reddit (RDDT 7.02%) went public at $34 per share on March 21. The social news platform provider's stock opened at $47 and ended its first day at $50.44. That gave it a market cap of $8 billion -- but it's still a lot smaller than larger social media companies like Meta Platforms (META 0.43%), Pinterest (PINS 4.04%), and Snap (SNAP 27.63%).

Will Reddit follow Meta's growth trajectory over the next few years and generate multibagger gains for its investors? Or will it fizzle out like Snap, which still trades at a steep discount to its initial public offering (IPO) price? 

Image source: Getty Images.

How does Reddit make money?

Reddit served 73.1 million daily active unique users (DAUq) in the fourth quarter of 2023. Roughly half of its users were in the U.S. The company splits that user base into two categories: logged-in users and logged-out users. Its main goal is to drive its logged-out users (who are merely browsing the site) to sign up and become logged-in users who actively post more content. The platform's year-over-year growth in DAUq users accelerated over the past three quarters, while its logged-in users have consistently accounted for about half its daily audience.

Data source: Reddit S-1 filing.

Reddit's audience is growing, but it warns that its DAUq growth could still "fluctuate or decrease" due to certain events. For example, the COVID-19 pandemic, the WallStreetBets meme stock phenomenon, the outbreak of the Russo-Ukrainian War, and the launches of hit video games like Elden Ring all drove more users to its platform over the past several years -- but those temporary growth spurts set it up for tough year-over-year comparisons.

Like Meta and Snap, Reddit generates most of its revenue from ads, and it gauges its monetization rates with its average revenue per user (ARPU). However, its year-over-year ARPU growth has decelerated significantly over the past two quarters.

Data source: Reddit S-1 filing.

That decline was driven by a downturn in its ARPU growth in the U.S., which offset its stronger ARPU growth in overseas markets. That's worrisome because Reddit's U.S. users still generated four to five times as much ARPU as its overseas users throughout 2023. It mainly blamed that slowdown on the macro headwinds for the advertising market.

However, investors should recall that Meta's ARPU rose 21% year over year in the fourth quarter of 2023 and accelerated throughout every quarter of the past year. Therefore, some of Reddit's headwinds might be specific to its platform.

Could Reddit become a social media giant?

For the full year, Reddit's revenue rose 21% to $804 million. It narrowed its net loss from $159 million to $91 million, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from negative $109 million to $69 million. Those numbers make Reddit look more like Snap -- which remains unprofitable on a generally accepted accounting principles (GAAP) basis -- than Meta, which has been firmly profitable on a GAAP basis since its IPO 10 years ago.

Yet Reddit still can't be directly compared to Meta and Snap because it's not a traditional social network. It's more of a diversified news aggregator and discussion forum that simultaneously competes against social media platforms, search engines, and peer-to-peer commerce platforms. Reddit also faces competition from OpenAI's ChatGPT and other generative AI platforms that could answer questions more efficiently than the human responses on its subreddits.

In terms of revenue, Reddit would be comparable to Meta -- which was then known as Facebook -- back in 2009. Facebook generated $777 million in revenue that year and served 360 million monthly active users (MAUs). But from 2009 to 2023, it grew its revenue at a compound annual growth rate (CAGR) of 44.5% to $134.9 billion. Meta's entire family of apps -- including Facebook, Messenger, Instagram, and WhatsApp -- now serves nearly 4 billion people on a monthly basis.

It could struggle to grow beyond its niche

For 2024, Reddit aims to grow its revenue by at least 20% and achieve a breakeven adjusted EBITDA. Those might be steps in the right direction, but it still needs to find new ways to expand its ecosystem, gain more logged-in users, stay relevant as the AI market evolves, and prove its system of relying on unpaid moderators is sustainable.

Unless it solves those issues and meaningfully expands beyond its niche, it won't grow into the next Meta over the next few decades. Instead, Reddit could suffer the same fate as Snap if it can't stabilize its sales growth and profits -- so investors should take a much closer look at its business model before chasing its post-IPO rally.