Reddit (RDDT) Analysis

Reddit (RDDT) has become a focal point for investors, igniting discussions on its growth potential and obstacles.

Bull Points

Large and Rapidly Growing User Base

As of June 2024, Reddit reported 342.6 million weekly active users (WAU), a 57% year-over-year increase, with 91.2 million daily active users (DAU). This growth indicates a robust platform ecosystem, viewed as a precursor to advertising revenue expansion. The user base surge is expected to enhance ad monetization, bolstered by consistent growth over the past five quarters.

Community-Based Engagement Growth

Reddit boasts over 100,000 active subreddits, fostering highly engaged, authentic communities. These subreddits provide attractive opportunities for targeted advertising and data licensing, creating substantial competitive barriers. Investors value this unique structure, enhancing the platform's retention.

Data Licensing Upside

Reddit's data licensing revenue soared 690% year-over-year in Q2 2024, propelled by an agreement with OpenAI and a partnership with Google’s Gemini. This data is crucial for AI language models, aiding in better understanding human language. Expectation for this segment is $500 million annually, up from a projected $100 million for 2024.

Margin Expansion

With a fixed-cost model, Reddit's user growth is anticipated to boost revenue significantly, potentially tripling EBITDA margins from 16% in 2024 to over 40% by 2030.

Enormous TAM (Total Addressable Market)

Global advertising is expected to surpass $1 trillion in 2024, with Reddit capturing merely 0.1%. This leaves considerable room for growth in advertising revenue.

International Revenue Potential

Though 50% of Reddit’s users are international, only 19% of its revenue originates outside the U.S. The rollout of translation tools in 35 new countries aims to harness revenue from non-English-speaking users.

Authentic Human-Generated Content

Reddit is noted for its authentic content, making it a preferred platform for market research and crisis management.

Bear Points

Profitability Concerns

Investors express worry about possible disruption to Reddit’s profitability due to rising competition, economic challenges, and reduced ad demand.

Monetization Challenges

Despite recent successes, Reddit's monetization strategies are relatively new, and scaling them may prove difficult, given the platform's nearly 20-year history.

Reliance on Google (NASDAQ: GOOGL)

Reddit's traffic relies heavily on Google Search, with 1.3 billion visits from search results in April 2024. This dependence makes Reddit vulnerable to shifts in Google’s algorithms.

Concentration Risk

The top 10 advertisers contributed 26% of Reddit’s total revenue in 2023, posing risks if these major clients cut spending.

Meme Stock Risk

Reddit communities have been pivotal in meme stock events, such as the GameStop short squeeze, which raises concerns over stock volatility and regulatory scrutiny.

Late to the Video Space

Reddit’s delayed entry into video content raises concerns about the competitive landscape and associated costs and risks.

Moderation Challenges

While Reddit’s unpaid moderators are a strength, the potential for their reduced engagement raises concerns about content moderation quality.