Finding stocks with big potential isn't easy -- but it's far from impossible. One of my favorite places to look is within the tech sector, as that is where many cutting-edge companies reside.
Today, let's look at a stock that only debuted a little over a year ago, but has already posted a solid track record in its time as a public company: Reddit (RDDT +1.98%).
Image source: Getty Images.
Why Reddit is poised to deliver big returns
Let's start by understanding how Reddit's business operates. The company runs an online social media platform where users post content on any number of different Reddit boards, which are organized by certain characteristics.
For example, musicians might post (or read posts) in any number of communities related to musical genres, instruments, or performers. Similarly, sports fans might engage with posts of their favorite team, sport, or player. In addition, some of the most popular subreddits are for broad categories like "humor" or "askreddit," which boast tens of millions of subscribers. All told, as of its most recent quarter (ended March 31), Reddit reported 108 million daily active unique users.
As a company, Reddit capitalizes on this enormous user base and flood of user-generated content in several ways. First, the company raises revenue via ad sales. Roughly 90% of Reddit's revenue is derived from ad sales, which is more or less in line with other social media companies. Meta Platforms, for instance, generates about 97% of its revenue from ad sales.
Second, Reddit's vast array of user-generated content provides another, more difficult to value asset: a treasure trove of dynamic, unpredictable, and nearly limitless data.
NYSE: RDDT
Key Data Points
While this unending supply of comments, images, and videos may not seem all that useful to the average person, it is very advantageous to those within the artificial intelligence (AI) community. That's because AI models need a near-constant stream of real-world data for training. Consequently, AI companies are willing to pay up for access to data.
Alphabet, for example, has already signed a data licensing deal with Reddit to help train its AI models. The deal is reportedly worth $60 million annually. Going forward, this AI licensing revenue stream could grow in importance for Reddit.
How Reddit stock could surge more than 600% in 10 years
So, Reddit has a significant user base and a large amount of data that it could license out to AI companies -- but how can it leverage those assets into a 600% return in just 10 years? The answer -- as it is with most technology companies -- is scale.
Let's take a look at Meta Platforms' 10-year stock performance to see why. In May 2015, shares of Meta Platforms (known as Facebook back then) traded for around $80. As of this writing, they trade at around $650 a share. That works out to a gain of about 700%. Over that same 10-year period, Meta averaged year-over-year revenue growth of about 31%.
As of its most recent quarter, Reddit's revenue is growing at 61% year over year, or roughly double what Meta produced over the last decade. Since Reddit produces a much smaller amount of revenue, it's possible that the company could grow its revenue faster than Meta did over the last decade. What's more, with a market cap of less than $20 billion, Reddit's stock has plenty of room to grow -- assuming the company can continue to increase its user base and revenue.
All that said, Reddit remains a young, growth-oriented company. Therefore, its stock isn't suitable for every investor or portfolio. However, for those willing to buy and hold for the long term, Reddit is a name to consider.
