Spencer Platt/Getty Images News Reddit (NYSE:RDDT), the largest position in our portfolio, has been performing strongly ever since reporting spectacular earnings that surprised even this ultra-bull. The company showed incredible revenue growth as well as achieving a key profitability milestone. It may appear that RDDT is trading like a meme stock, but its financial results indicate that it is anything but. I continue to find the stock highly attractive here, even if it can be uncomfortable to be early. I rate RDDT a conviction buy, as I view it to be the most compelling name in my coverage today. RDDT Stock Price I last covered RDDT prior to it coming public, where I rated the stock a strong buy. RDDT came public at $34 per share and closed its first day of trading at just above $50 per share, and is trading much higher than that. This distinction does not mean that the stock is overvalued or in a bubble – much to the contrary. Data by YCharts The company’s first quarter results more or less “de-risked” the investment thesis as the company is shaping out to be a new sector leader. Focus less on the price action and more on the fundamentals. RDDT Stock Key Metrics Reddit is a social network which is differentiated by its organizational focus on communities, called “subreddits.” S-1 I view RDDT as having the reach and relevance of Meta Platforms (META) but with less than 1% of the revenue base. In the first quarter, RDDT generated 48% YoY revenue growth to $243 million. This was driven by 39% advertising revenue growth, which easily paces social media peers, as well as data licensing revenue (making it a legitimate Generative Ai play). 2024 Q1 Shareholder Letter The company saw daily active users grow 37% YoY to 82.7 million. This included 27% growth in Logged-in users and 48% growth in Logged-out users. 2024 Q1 Shareholder Letter RDDT saw its average revenue per user (‘ARPU’) grow at a slow 8% YoY to just $2.94. United States ARPU stood at just $4.77 – representing a huge gap to peers. As I stated in my prior report, “META reports its ARPU at $68, Snapchat (SNAP) at $8.96, and Pinterest (PINS) at $8.07.” As a user of all of these apps, I find this point to be highly surprising as I see little reason why Reddit should be less monetized than peers, let alone to this extent. This is the opportunity. 2024 Q1 Shareholder Letter The company generated $10 million in adjusted EBITDA in the quarter, the first time the company achieved this in the first quarter (which is seasonally the weakest quarter). I expect the company to show stronger profitability metrics moving forward, especially in light of the data licensing partnership with OpenAI announced subsequent to the quarter. The company ended the quarter with $1.67 billion of net cash, which is more than enough given that the company is already operating at a cash flow breakeven profile. 2024 Q1 Shareholder Letter Looking ahead, management guided for the second quarter to see between $240 million and $255 million in revenue (consensus estimates call for around $252 million), representing 31% YoY growth at the low end. I expect the company to trounce that target as it is implying minimal sequential growth. 2024 Q1 Shareholder Letter On the conference call, management noted that revenues grew 5x faster than OpEx in the quarter, but that their long term target is 2x. Even that lower target implies a commitment to some operating leverage. Management targeted a “low single-digit” range for dilution, which looks achievable. The aforementioned data licensing deal with OpenAI is likely to be high-margin – I expect it to flow directly to the bottom-line and provide a quick near-term boost to profitability. Management noted that they lacked visibility into the second half, which appears to be what bears have latched onto, but I reiterate that this is a multi-year story. Is RDDT Stock A Buy, Sell, or Hold? This was a great quarter in which the company showed sector-leading top-line growth, improving profitability, and ample net cash on the balance sheet. I’m more excited for the long term opportunity. In the company’s shareholder letter, management gave some examples for how they were integrating AI into the platform. They have found success in using AI to guide users to make better posts – this may help to reduce their moderation costs over time. 2024 Q1 Shareholder Letter I was more excited for the launch of their machine translation capabilities. RDDT is still primarily a US-based app due to English being the primary language. Generative AI may help remove these language barriers and jumpstart the company’s growth in international markets. This is not priced in the stock today, as I see the stock generating great returns even based on just the US users. 2024 Q1 Shareholder Letter Consensus estimates still look too conservative, hovering at around 20% growth over the next several years. I note that the P/S numbers may be understated due to most financial providers using 160 million shares outstanding (but I am using 200 million fully diluted shares as confirmed by Investor Relations). Seeking Alpha Based on 200 million fully diluted shares, the stock trades at around 12.7x this year’s sales estimates, or 11.2x net of cash. Contrary to the prevailing view, I view this valuation as being cheap – here’s why. Meta Platforms (META) is generating 50% margins in its FoA businesses and I see that number heading higher over time. I expect RDDT to generate 50% net margins over the long term, if not higher, given that its platform appears to be less costly to maintain. Let’s instead assume 40%, though. Over the long term, I see the stock trading at around 12x sales, implying a 30x earnings multiple. But for our modeling purposes, I will instead use 10x sales (correlating to a 25x earnings multiple). The appeal of RDDT is that it is an under-monetized platform which (in my view) should be able to sustain 20% or greater top-line growth for a really long time. These kinds of stories typically trade at very rich valuations – look at names like Snowflake (SNOW), Cloudflare (NET), and CrowdStrike (CRWD). With RDDT trading at around 12x sales even at current prices, that implies that the stock may be able to deliver forward returns in the 20% to 30% range, roughly equivalent to top-line growth rates. Even if RDDT were to trade at 20x sales, implying a $22 billion market cap and $110 stock price, from there the stock would still be priced for 10.5% compounded annual returns over the next 9.5 years (assuming 20% annual growth and a 10x ending P/S multiple). Best of Breed Growth Stocks Returns may be even higher than that as 20% may prove to be a low-bar. I note that revenues would stand at $5.7 billion after 10 years of 20% annual growth. In comparison, Snapchat (SNAP) is projected to do $5.3 billion and META is projected to do $158 billion in 2024. I realize that it can be uncomfortable to do this kind of analysis, as it is very hand-wavy and TAM-like. The point here is though that RDDT is priced very attractively even without having to do this kind of hand-wavy analysis, as the stock currently trades at around 12x sales (not the 20x sales multiple used in the above discussion). I think that top-line growth rates hover more in the 30% range over the next 3-5 years, and the stock re-rates sharply higher once the market realizes that this isn’t just another meme stock, but a name possessing one of the more robust growth stories out there due to its under-monetized status. My 12 month price target is $107, representing 15x 2025e sales (I am using just $1.32 billion and net of cash). I see upside to that target if RDDT can post stronger than 20% growth in 2025 and if the stock can trade at higher multiples to reflect its stronger growth opportunity. RDDT Stock Risks There are two main risks here. First, I may have mis-evaluated the relevance of the Reddit platform. The crucial part of the investment thesis is that I view Reddit to be the only social media platform which does not have TikTok risks and has increasing relevance given that it is where users will do more of their searching activities. Perhaps Reddit might prove to be a casualty of generative AI, and skeptics might suggest that this explains the urgency to monetize data licensing. However, while many users might interact with Reddit solely through Google Search, I view this to mainly be a marketing strategy as Reddit is a highly attractive platform in its own right, something that loyal users use similar to Instagram or TikTok (the “death scroll”). With the IPO lockup period ending on August 9th, the stock may see elevated volatility as insiders sell their shares. If Wall Street has not yet come to a similar view as I laid out in this report, then the stock might not see as much valuation support as expected given that the stock trades at a premium relative to social media peers. RDDT Stock Conclusion These were great numbers from RDDT. The stock has proven volatile, but the math checks out, and I am in no hurry to cash in our profits. RDDT is undoubtedly the most expensive name in our portfolio, but it has arguably the strongest growth story and one which I can see “beating and raising” frequently moving forward. It is understandable that many investors may be hesitant given that the stock is effectively a double from its IPO offering price, but the stock looks attractive given the long growth runway ahead of it. I rate the stock a conviction buy.
sekar nallalu Cryptocurrency,Julian Lin,META,PINS,RDDT,SNAP Top Pick: Reddit Stock Is A Conviction Buy (NYSE:RDDT)