Reddit (RDDT -4.72%) has been a volatile stock since its public debut. The social media company listed its shares at $34 on March 21, and they started trading at $47 before rallying to a record high of $74.90 just five days later.
Reddit's stock subsequently pulled back to the mid-$40s, but a strong first-quarter report and a new partnership with OpenAI catapulted its stock back to the low $60s. Reddit is now worth $9.6 billion, but it's still a lot smaller than other social media companies like Meta Platforms, Pinterest, and Snap.
So, looking into the distant future, could Reddit eventually grow more than 100 times larger and become a trillion-dollar company?
Image source: Getty Images.
What are Reddit's catalysts and challenges?
Reddit is different from other social media platforms because it's also a discussion forum and news aggregator, which competes against traditional search engines. As a result, many of Reddit's visitors visit the site for insights without logging in, posting their own content and engaging in conversations with other users. Those casual visitors are much harder to monetize with ads than its logged-in users.
To keep growing, Reddit needs to gain more daily active unique users while increasing its ratio of logged-in users. At the end of 2023, it had 73.1 million daily active unique users, which represented 27% growth from a year earlier. Its number of logged-in users rose 21% to 36.4 million -- but that only accounted for 49.8% of its daily unique users.
In the first quarter of 2024, its daily active unique users increased 37% year over year to 82.7 million. Its total number of logged-in users rose 27% to 39.6 million -- but its ratio of logged-in users dipped to 47.9%. Therefore, Reddit needs to find more ways to convert its users to registered members.
One of those ways might be its new partnership with OpenAI, which allows it to tap the start-up's tools to build new AI services for its own platform. Those AI tools could reduce Reddit's dependence on its unpaid human moderators, help it aggregate more trending news stories, and support the long-term expansion of its platform.
The deal will also allow OpenAI's ChatGPT to pull more information from Reddit's platform to feed its own responses. Reddit also struck a similar deal with Alphabet's Google earlier this year. Reddit can hope those partnerships drive more users to its platform and eventually turn them into registered users. However, fewer people might sign up if ChatGPT and Google aggregate too much data from Reddit into their own responses.
Furthermore, Reddit's growth has often been driven by major events like the pandemic, the /WallStreetBets meme stock phenomenon, the Russo-Ukrainian war, and elections. Therefore, its user growth could ebb and flow at a less predictable rate than traditional social media platforms like Meta's Facebook and Snap's Snapchat.
The mathematical path to a trillion-dollar valuation
Reddit currently trades at 8.5 times this year's estimated sales. Assuming its price-to-sales ratio holds steady, it would need to increase its annual revenue at a compound annual growth rate (CAGR) of 20% from an estimated $1.1 billion in 2024 to $117.6 billion in 2050 to reach a market cap of $1 trillion by the final year.
Yet that seems like a conservative growth trajectory compared to many of its social media peers. Meta's revenue grew at a CAGR of 40% from 2009 to 2023, while Snap's revenue increased at a CAGR of 72% from 2015 to 2023. Pinterest's revenue rose at a CAGR of 36% from 2017 to 2023.
Maintaining a steady CAGR of 20% over a 26-year period could be difficult for Reddit to achieve, but it's off to a promising start. Its revenue rose 21% in 2023, and analysts expect it to continue growing a CAGR of 26% from 2023 to 2026.
Reddit's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are also expected to turn positive this year as it reins in its spending. If it grows its adjusted EBITDA at a CAGR of 26% from an estimated $104 million in 2024 to $40 billion in 2050, it could reach a $1 trillion market cap if it trades at 25 times that figure.
Analysts already expect its adjusted EBITDA to rise at a CAGR of 73% from 2024 to 2026, so its profitability could improve significantly over the next three decades.
But will it become a trillion-dollar stock?
Reddit has a narrow but viable path toward becoming a trillion-dollar stock by 2050, but it's impossible to accurately predict its growth trajectory over such a long period. It could struggle to gain more users, new competitors could render it obsolete, and its growth could be derailed by deep recessions and other macro challenges.
So for now, investors should focus on its ability to grow its number of daily users, increase its ratio of logged-in users, and expand its adjusted EBITDA margins. If it checks those three boxes, its stock could head a lot higher over the next few years.
