Sometimes the very best growth stocks are hiding in plain sight. That's certainly the case here. Better yet, you can step into this prospect while it's trading at a healthy discount. And best of all, the company's recent swing to profitability is not only here to stay, but is expected to widen.
The stock in question? Reddit (RDDT -1.13%).
Reddit? That Reddit?
You're reading that right. Reddit is now a publicly traded outfit. Although it's been around for 20 years -- long enough to blend back into the worldwide web's crowded landscape -- it finally went public in early 2024.
But what is it? Even its very earliest and most regular users might struggle to explain it simply because there's nothing else quite like it.
More than anything, it's a digital bulletin board, although the description doesn't quite do it justice. It's home to over 100,000 narrowly focused active communities made up of people who (very often) don't know one another in real life. These communities are grouped by interests ranging from investing to video games to humor to science, and more, with several so-called subreddits within each of those topical groupings. There are no membership fees or subscriptions, and users can participate as much or as little as they want. Last quarter, over 100 million users visited at least one of its community pages every single day.
Image source: Getty Images.
So, how does it make money? The way you'd expect a platform like it to ... advertising. The company inserts ads into each community's text-based discussions. Yet that's not the only revenue-bearing business it's in.
And this is where things start to get interesting for growth-seeking investors.
Reddit has an artificial intelligence (AI) catalyst
Reddit has always sought to monetize its web traffic. It didn't turn up the proverbial heat on growing into a sustainable business, however, until roughly 2020.
Yes, the COVID-19 pandemic played a big role in the big-time growth that started to take shape then. People were largely stuck at home and turned to the web for information, engagement, and entertainment; Reddit offered all three.
That's not the only contributing factor to its sudden and persistent growth since then, though, and arguably not even the biggest one.
Data source: StockAnalysis.com. Chart by author.
While he's been a stakeholder for several years now, OpenAI's (the company behind ChatGPT) CEO Sam Altman spent several years leading up to the Reddit IPO adding to his investment in Reddit. He now owns about one-tenth of the company, in fact, and for a short while was even on Reddit's board of directors.
In and of itself, that doesn't mean much; plenty of wealthy people invest in private start-ups.
There was arguably more to Altman's interest in Reddit than mere opportunity. As it turns out, artificial intelligence (AI) platforms like ChatGPT regularly use platforms like Reddit for information that's turned into a response to a query. Although it may have unofficially been happening well before then, in early 2024 -- shortly after the IPO -- this revenue-bearing business relationship between OpenAI and Reddit was made official.
In other words, it's no coincidence that the rapid growth of Reddit's revenue is happening in step with the rapid proliferation of consumer-friendly, chat-based artificial intelligence tools.
Of course, the continued growth of chat-based AI will translate into continued growth of Reddit's business, setting the stage for sustained and growing profits.
Fresh growth initiatives
AI platform partnerships still only account for a minority of Reddit's revenue, to be clear. But that doesn't mean they're not important. This more reliable and high-margin revenue has allowed Reddit to invest in more conventional growth.
Case in point: Just a few days ago, the company unveiled a new AI-powered tool meant to help its own advertising customers advertise more effectively. Called Reddit Community Intelligence™, this tech allows advertisers to run better-targeted ads based on the context and content of the comments appearing at any particular Reddit page. Early testing of this offering shows a measurable increase in clicks and conversions, which, of course, makes Reddit more marketable as an advertising medium.
Separately, Reddit recently announced that users' comments to a particular post could be turned into a stand-alone post of their own. In theory, this will increase overall user engagement by facilitating more narrowly focused discussions.
Of course, narrower discussions will allow for more targeted ads for advertisers and their new AI-powered technology.
Then there's the even more qualitative reason to be optimistic about Reddit's foreseeable future. That's its schtick. In an environment where more traditional social media platforms like Meta Platforms' Facebook, TikTok, and X (formerly Twitter) aren't exactly aging well due to their increasing toxicity, something a little less personally social is a breath of fresh air. Indeed, less-polished platforms like Reddit provide the authenticity that younger consumers are seeking ... consumers that specifically don't want to participate in the same social networks as their parents. Underscoring this claim is the fact that Reddit's daily user base has grown from 82.7 million a year ago to 108.1 million now.
Don't wait on Reddit stock
So why is the stock trading down about 37% from its February peak despite its 62% run-up from its April low? Unusual circumstances, mostly.
Despite its relatively lethargic start as a publicly traded stock, the right combination of headlines, results, and optimism finally lit a fire under Reddit shares in October 2024. As is also so often the case with a newly minted ticker, however, the bulls got a little bit ahead of themselves. Reddit was already vulnerable at the time, so when the marketwide correction took hold in February, this stock was an easy target.
In the same sense, the bulls overshot their target in the latter half of last year, though the bears did the same this year. The rebound since April is simply the stock figuring out where it needs to be now that most of the usual post-IPO volatility has been wrung out.
That's not to suggest there won't be more extreme volatility ahead. There almost certainly will be. The worst of any Reddit unpredictability is in the rearview mirror, however, with more net upside than downside ahead.
That's what the analyst community is saying, anyway. Most of them currently rate Reddit shares as a strong buy. They may be keying in on the fact that the business is at a key tipping point. That is, there's now enough scale to more than cover the company's operating costs, with revenue likely to continue rising much faster than expenses for at least several more years.
Bottom line? After 20 long years, Reddit appears to have finally turned the profitability corner. That alone is a pretty compelling bullish argument for growth investors that can stomach a bit of risk.
