Two new social media stocks gained a lot of attention in late March: Trump Media and Technology Group (DJT +4.16%), or TMTG, the owner of Truth Social; and Reddit (RDDT +0.83%), which calls itself the "front page of the internet."
TMTG merged with a special purpose acquisition company (SPAC) on March 26. Its stock opened at $70.90 but subsequently dropped to about $62, and recently traded around $53. Reddit went public at $34 through a traditional IPO on March 21. Its shares opened at $47 and soared to a record high of $74.90 five days later, but pulled back to about $48 as of this writing.
Should investors buy either of these volatile social media stocks right now? Let's review their business models, growth rates, and valuations to decide.
Image source: Getty Images.
TMTG is trading at nosebleed valuations
TMTG was founded by former U.S. president Donald Trump in October 2021. In February 2022, the company launched Truth Social to compete against Twitter (now known as X) and Meta's (META +1.81%) Facebook in the social media market.
Yet Truth Social is still tiny compared to those market leaders. A regulatory filing revealed that it had 8.9 million sign-ups as of February, while SimilarWeb estimated that only 5 million of those accounts were monthly active users (MAUs). X claims to have more than 500 million MAUs, while Facebook served 3.07 billion MAUs at the end of 2023.
NASDAQ: DJT
Key Data Points
In the first nine months of 2023, TMTG generated $3.4 million in revenue but posted an operating loss of $10.6 million and a net loss of $49.0 million. Those numbers are minuscule relative to its current market capitalization of $7.03 billion.
So even if TMTG generates $5 million in revenue for the full year, it would still be valued at more than 1,400 times its annual sales. Meta trades at just 8 times this year's sales and is firmly profitable.
TMTG's valuations don't seem sustainable, but some people might be buying the stock to support Trump's presidential campaign. Trump owns at least 58% of the company. It's also gained a lot of momentum as a meme stock. As of this writing, it's the most widely discussed stock on Reddit's WallStreetBets subreddit.
But with just $1.8 million in cash on its balance sheet at the end of the third quarter of 2023, TMTG could easily go bankrupt before it gets a chance to raise fresh cash by taking on more debt or selling more shares. In other words, it's a risky stock that isn't supported by a sustainable business.
Reddit's valuations look more reasonable
Reddit was founded 18 years ago, and carved its niche as a platform for aggregating news stories and discussion forums. It served 73.1 million daily active unique users (DAUq) at the end of 2023, which represented 27% growth from a year earlier. However, only half of those users were logged in. The other half were merely browsing the site instead of posting new content and chatting with other users.
Reddit is trying to convert more of its logged-out users into logged-in ones who are easier to monetize through ads, but it faces intense competition from traditional search engines, social networks like Facebook, and new generative AI platforms like ChatGPT which can answer questions more efficiently than searches on Reddit. Reddit also has struggled to monetize its higher-revenue users in the U.S. over the past year.
NYSE: RDDT
Key Data Points
But despite all of those challenges, Reddit's revenue still grew 21% to $804 million in 2023. The company also narrowed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $109 million to $69 million.
For 2024, it expects revenue to grow at least 20% as it achieves a breakeven adjusted EBITDA. Based on the current market cap of $7.8 billion, Reddit trades at 10 times its trailing sales.
Reddit had $401 million in cash and equivalents on its balance sheet at the end of 2023, and raised another $748 million from its IPO. That cash should provide plenty of time to expand and narrow losses, but its user growth is still volatile and driven by news events. It's also heavily dependent on unpaid moderators. If Reddit's platform becomes flooded with controversial topics and top moderators demand better compensation, its entire business model could quickly collapse.
The winner: Reddit
I wouldn't rush to buy either of these speculative social media stocks right now. But if I had to choose one over the other, I'd pick Reddit because it's generating more stable growth, has a clearer path toward profitability, and is trading at lower valuations. TMTG is a stock that is running on news, hype, and politics instead of the growth of its underlying business.
