2025 is proving to be a volatile year for the stock market, as economic uncertainty and unpredictable policies from the Trump administration throw investors for a loop. While anything can happen in the near term, growth investors should focus on investing in fast-growing companies with no shortage of long-term potential. Reddit (RDDT 0.04%) and Confluent (CFLT 0.08%) undoubtedly fit the bill.
1. A social media powerhouse
Reddit is a social media network unlike any other. The company's platform, split into subreddits covering specific topics, has emerged as one of the best ways for people to find useful information on the internet. While Alphabet's Google Search is still the king, a focus on serving advertisements and artificial intelligence (AI) overviews of dubious quality can lead to poor results for users.
NYSE: RDDT
Key Data Points
As Reddit works to better monetize its platform, revenue and usage are soaring. Daily active unique users shot up 39% year over year in the fourth quarter of 2024 to 101.7 million, and revenue surged 71% to $427.7 million.
Reddit currently makes money through advertising sales and deals with AI companies for data access. Later this year, Reddit is reportedly planning to launch a feature that could lock some content behind paywalls. While this will be tricky to get right without upsetting users, it represents another potential revenue stream.
Reddit is already profitable, generating a generally accepted accounting principles (GAAP) operating margin of about 12% in the fourth quarter of 2024. Gross margin was an impressive 93%, allowing the company to spend heavily on research and development while still churning out profits.
Reddit runs its platform on third-party cloud computing platforms rather than its own infrastructure, so capital spending is minimal. This asset-light business model helped produce $215.8 million in free cash flow last year.
Valued at nearly $21 billion, Reddit is an expensive stock relative to earnings. The stock has also taken a beating lately, tumbling more than 40% from its all-time high. While these two factors may scare some investors away, Reddit is a unique platform that can leverage its status as a source of trusted information to grow revenue and profit rapidly in the coming years. The stock will likely be volatile, but it's a great choice for long-term investors.
2. An enterprise software winner
Large enterprises with complex IT infrastructures need a robust way to connect applications together. Connecting applications directly to each other is fragile, resulting in a web of complexity that could break mission-critical data flows when anything goes wrong.
Apache Kafka, an open-source event streaming platform, has become extremely popular among large companies to solve this problem. Major players in manufacturing, banking, insurance, telecom, and other industries rely on Kafka.
One problem is that Kafka is a complex piece of software that requires proper configuration and management. Confluent, which was founded by the creators of Kafka, solves this problem by building propriety features on top of Kafka and other open-source software. The company's data streaming platform now has around 5,800 customers, including nearly 1,400 that spend more than $100,000 annually.
NASDAQ: CFLT
Key Data Points
Confluent's growth has been impressive, particularly for its Confluent Cloud platform. Cloud revenue rose 38% year over year in the fourth quarter, which helped push up total revenue by 23% to $261.2 million. Confluent is just scratching the surface of its total addressable market, which the company pegs at $60 billion.
Confluent is still in growth mode, so it's not yet profitable on a GAAP basis. However, the company is producing positive free cash flow, an important step toward profitability. Shares of Confluent have taken an absolute beating since peaking in late 2021, down around 70%. While the stock is tough to value given the lack of profits, strong revenue growth and an attractive value proposition for its enterprise customers makes Confluent a long-term buy for growth investors.
