It didn't take long for Ark Invest co-founder CEO Cathie Wood to grab a piece of Reddit (RDDT 10.04%). She initiated a position in the popular online discussion forum on March 21, the day it went public. She waited until Wednesday, nearly seven weeks later, to add to that stake.
Coming back for more Reddit is significant. It could also be one of the smart moves Wood will have to make to get her aggressive growth funds back on a winning streak. Let's dive into some of the reasons why Ark Invest is buying into the fast-growing social platform now.
1. Reddit is making a good first impression
There was no shortage of excitement when Reddit went public two months ago. Although underwriters priced the shares at $34, the stock opened at $47, closing just above $50 on its first day of trading. Reddit peaked at $74.90 on its fourth day on the market, but the shares are back to roughly where they were at the close on March 21.
Even though the stock went on a round trip to nowhere, the same can't be said about the fundamentals. Reddit posted its first financial results as a public company this week, and it cleaned up nicely.
Revenue clocked in at $243 million in the first quarter, a better-than-expected 48% increase. Analysts were banking on just 30% in top-line growth. Reddit posted a large loss, but that was expected given the stock-based compensation expense and related taxes as a result of the IPO. Take away the one-time hits, and Reddit still manage to post positive adjusted earnings before interest, taxes, depreciation, and amortization of $10 million. It also came through with $29 million in free cash flow.
It didn't take long for Reddit to prove itself to be a responsible debutante. An IPO's first financial update is huge. Sometimes it's a company that's just looking to cash in on a craze, only to falter as a business. Reddit came out swinging and hit it out of the park.
Image source: Getty Images.
2. The platform is growing in exciting ways
An online community of communities is only as strong as its audience and its ability to monetize that base. To that end, Reddit's first quarter shows some impressive headway. Daily active uniques rose 37% to 82.7 million in the quarter. Weekly active uniques soared 40% to 306.2 million. Typically you'd like to see daily actives growing faster than weekly check-ins, but it's impressive growth on both fronts.
Right now this is largely a stateside story. A little more than half of Reddit's daily actives -- 41.5 million -- are in the U.S., and just 18% of its revenue is coming from outside the country. It's probably not a surprise to learn that average revenue per user is a lot higher for the platform's domestic audience, at $4.77 through the first three months of the year, compared with just $1.10 for international users.
The disparity is wide for regional monetization, but like weekly uniques that are outpacing the daily visitors, this is also an opportunity. If engagement is clicking, you'll see the daily actives start to pull ahead. Just wait until international ad revenue starts closing the gap.
3. Guidance is promising
Revenue growth has accelerated at Reddit for three consecutive quarters. The year-over-year gains were 13%, 21%, and 25% in the last three quarters of last year, respectively. Then the IPO happened, and the pace of its top-line growth jumped 48%.
Now we get Reddit's first shot at providing guidance. It's targeting adjusted EBITDA of flat to $15 million for the current quarter, so achieving positive adjusted EBITDA in the first quarter for the first time wasn't a fluke. It also sees $240 million to $255 million in revenue for this June-ending quarter. Reddit generated $183 million in revenue for the second quarter of 2023, so its top-line guidance calls for 31% to 39% growth. This could be the end of the streak of accelerating revenue growth, but it's still moving a lot faster than it was before it went public.
Let's also not carve guidance in stone. Reddit's next test will come in three months, when it reports its second-quarter numbers. It already made a strong first impression. Can it cement its status as a market star with its first beat and raise as a public company?
The future is bright for Reddit as a speedster among social media stocks. You can't blame Wood for buying a disruptor early in its growth cycle. This is where the best kind of investor stories start.
