The Reddit stock (NYSE:RDDT) IPO occurred on March 21, with shares starting at $47 and reaching nearly $75. This marked a 120% increase from its initial $34 offering, and at its highest point, Reddit’s market cap was approximately $12.2 billion. The IPO represents a significant progress for the platform, being the first social media company to go public in years.
Despite its popularity, Reddit has not yet achieved profitability. The company recognizes future challenges in this area. So, is Reddit stock a buy, sell, or hold following its IPO?
One less-discussed aspect of Reddit is its AI potential. Its vast collection of user-generated content offers a rich source of genuine, long-form discussions. This places Reddit as a player in the AI ecosystem, not influenced by individual AI stock performance. As AI’s significance grows, platforms like Reddit are well placed to benefit from the demand for quality training data.
In terms of growth, Reddit monitors metrics like Weekly Active Unique (WAUq) and Daily Active Unique (DAUq) users. In Q4 2023, global DAUq jumped by 27% year-over-year, with the U.S. segment growing by 34% and international by 21%. However, Reddit’s growth is vulnerable to external factors, and a large portion of new users are logged out, which poses challenges for revenue generation and monetization efforts.
David Trainer, CEO of New Constructs, recently critiqued Reddit’s IPO. He suggested that the company might have trouble monetizing its user-generated content without upsetting its user base. However, with the potential for disruption in the social media industry due to pending legislation and Reddit’s significant user base growth, the company’s timing of its IPO could be beneficial to shareholders.
Wall Street analysts see further growth potential for Reddit. The company expanded its user base by approximately 40% between 2021 and 2023. Some analysts have identified significant growth opportunities for Reddit outside the U.S., particularly in English-speaking countries like India. Expanding its accessibility globally could drive further growth.
However, monetization remains a challenge, despite plans to license user data for AI training. This is exemplified by a recent $60 million deal with Google. Some users have expressed concerns about their content being used for AI, prompting regulatory scrutiny.
Baird issued a Neutral rating for Reddit stock on Thursday. They set a modest $50 price target due to its perceived high valuation post-IPO. Analyst Colin Sebastian praised Reddit’s unique online platform, citing its expanding user base, extensive user-generated content, and generally safe environment for advertisers. He also highlighted the potential for Reddit’s platform to be licensed for training AI models, suggesting it could offer new revenue streams.
Reddit’s upside potential is unique, and the stock is fairly valued relative to its peers. However, waiting for the dust to settle before building a position makes sense. At this moment, the stock is a hold, though it would be considered a buy below $40 per share.
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