Reddit (RDDT +0.60%) went public on March 21 at $34 a share. The social media company's stock opened at $47 and closed at a record high of $74.90 just five days later, but subsequently pulled back to about $46.
Its stock could stay volatile over the next few months, but let's take a longer view and see where it might head over the next five years.
How fast is Reddit growing?
In 2023, Reddit's revenue rose 21% to $804 million as it narrowed its net loss from $159 million to $91 million. It also narrowed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from negative $109 million to $69 million.
Image source: Getty Images.
Reddit served 73.1 million daily active unique users (DAUq) in the fourth quarter of 2023, which represented 27% growth from a year earlier. However, only half of those users were registered and logged in to its platform. The other half consisted of users who were only browsing the site instead of actively posting content.
Reddit wants to grow its ratio of logged-in users, who are easier to monetize with ads and other features. But that could be challenging because its percentage of logged-in users actually declined sequentially in the fourth quarter. It also admits the usage of its platform is often driven by certain events -- including the pandemic, the WallStreetBets meme stock phenomenon, the Ukrainian War, and elections -- so we shouldn't expect it to consistently grow its DAUq at a steady rate.
Reddit's average revenue per user (ARPU) in the U.S. also flatlined in the third quarter of 2023 and fell year over year in the fourth quarter. That slowdown offset its overseas ARPU growth and caused its total ARPU to decline in the fourth quarter. That's a red flag, because its U.S. users generate much higher revenue than its overseas users.
NYSE: RDDT
Key Data Points
What will happen to Reddit over the next five years?
But despite all of those challenges, Reddit claims it can grow its revenue by at least 20% and achieve a breakeven adjusted EBITDA in 2024. With its current market cap of $7.3 billion and a target of $965 million (20% growth) in revenue in 2024, it trades at just under 8 times this year's sales.
By comparison, analysts expect Meta Platforms (META +1.81%) and Pinterest (PINS +0.07%) to grow their revenue 17% and 18%, respectively, in 2024. Based on those estimates, Meta and Pinterest trade at 9 times and 7 times this year's sales, respectively.
Therefore, Reddit's stock looks reasonably valued if it can continue growing its revenue at a compound annual growth rate (CAGR) of 20% over the next five years. If it maintains that impressive growth trajectory, it could generate about $2 billion in revenue in 2028. A price-to-sales ratio of 8 would give it a market cap of $16 billion -- which would be more than double its current valuation. It would also likely turn profitable on an adjusted EBITDA basis as economies of scale kick in.
Yet Reddit needs to address several major issues before that happens. It admits that a lot of its content is already being used to train popular generative AI platforms like OpenAI's ChatGPT, and those chatbots might lure away its logged-out users by answering their questions more efficiently. Reddit also depends on an army of unpaid moderators, which is highly unusual because Meta and its social media peers usually outsource the moderation process to smaller companies that actually pay their moderators. If Reddit's moderators demand to be paid, its operating margins could crumble.
All of these factors make it tough to believe that Reddit can maintain a CAGR of 20% for five years. If it only grows at a CAGR of 15% over the next five years, its annual revenue could nearly double to $1.6 billion by 2028.
But that slower growth would also drive Reddit to trade at a lower valuation. If it's trading at 5 times sales with $1.6 billion in revenue in 2028, it would only be worth $8 billion -- a mere 10% gain from its market cap.
So where will Reddit's stock end up in 2028?
Without seeing Reddit's first few quarterly reports as a public company, it's too difficult to predict where its stock will end up in five years. The three Wall Street analysts who are covering Reddit so far expect its revenue to rise at a CAGR of 25% from 2023 to 2026 -- but that consensus forecast could fluctuate wildly as more analysts start covering the stock.
However, I believe Reddit will grow at slower-than-expected rate as it struggles to stabilize its user growth, monetize its users, and widen its competitive moat against big search engines, social media platforms, and generative AI chatbots. All of those challenges could cause it to underperform more resilient social media companies like Meta Platforms and Pinterest over the next five years as it tries to prove that its business model is sustainable.
