After a long wait, Reddit (RDDT 7.02%) is finally a publicly traded company.
Shares of the social media stock soared on its debut Thursday as skepticism about its lack of profits gave way to enthusiasm for its potential in artificial intelligence (AI) as Reddit has sold itself on the value of its content for training large language models like ChatGPT.
Retail investors were mostly left out of the initial public offering (IPO) bonanza as Reddit shares priced the IPO at $34 but opened for trading at $47 a share, giving a windfall to investors who were able to buy the stock in the IPO or to those who owned it beforehand.
Among the most high-profile winners in the Reddit IPO was Sam Altman, the CEO of OpenAI, who has long had a close relationship with Reddit. He's been an investor in the social media start-up for several years; he also previously served on the board of directors and was even the CEO of the company for eight days.
Altman owns Reddit stock through various entities, and his stake in the social media stock was estimated to be worth $600 million after its opening-day pop. ARK Invest's Cathie Wood also piled into Reddit on its first trading day with her company's funds buying roughly 10,000 shares of Reddit, worth about $500,000.
It's worth paying attention to the moves that top investors like Altman and Wood make as they can have special insight into what's happening with the company or with new technologies like AI. Altman announced his investment in Reddit back in 2014, saying he had been a daily user of Reddit for nine years, dating back to the company's early days. He predicted that it could eventually have close to a billion users, which hasn't happened. At the time, artificial intelligence didn't seem to play a role in his investment, but it has since then, as Reddit is now licensing its data to OpenAI and others for training large language models like ChatGPT.
Image source: Getty Images.
Can Reddit be a winner for you?
Reddit's unique position as a bridge between social media and AI is an intriguing one, and the company has aspirations to expand into industries like e-commerce as well, envisioning some of its subreddits becoming marketplaces.
However, investors should be clear-eyed about the risks in Reddit stock. The company has been operating for nearly 20 years, but it has never been profitable for a full year. CEO Steve Huffman seemed to help give the stock a boost in its first trading day as he pointed to profits in the second half of last year. He noted the company's improving unit economics and that its gross margin is nearly 90%. However, the company typically benefits from seasonality in the fourth quarter as advertising increases during the holiday season. More than half of the company's revenue went to research and development (R&D) last year, which includes salaries for engineers and other employees, as well as consulting services and other costs associated with R&D. It's unusual for a business to spend that much of its revenue on R&D, but that also may be a function of the company's accounting as it includes existing products as well as new ones.
It's unclear when Reddit expects to turn a profit, though Huffman's comments above hint that it could be sooner than expected.
Do the numbers add up?
Reddit's revenue grew by 21% last year to $804 million, and the company lost $87 million on a generally accepted accounting principles (GAAP) basis, though that was a substantial improvement from a loss of $158.6 million in 2022. However, after the IPO pop, Reddit stock isn't cheap, trading at a price-to-sales ratio of about 10, which is similar to Meta Platforms and modestly more expensive than Pinterest. But Meta is highly profitable, and even Pinterest is profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, which Reddit is not.
At this point, Reddit stock looks fairly risky and speculative. While the AI angle is intriguing, at this point, the stock needs the best-case scenario to materialize in order to deliver significant returns from here. Investors are better off waiting for a lower entry point or clearer evidence that Reddit is on its way to sustainable and growing profits.
