Does Reddit Stock (NYSE:RDDT) Need A Second Look One Month On From IPO

Reddit shares (NYSE: RDDT) have been trading in a much more stable range since the post IPO hype has settled. One month on, we take a look at the stock to see what markets are making of RDDT.

Hitting markets at the higher end of its range (between $31 and $34), Reddit's shares soared by over 40% on opening, peaking all the way up at an impressive $74.90 before coming back down to earth, still more than 20% above that IPO mark.

The volatility seen in the stock underscores the market's uncertain sentiment toward the social media platform, famous for its vast and engaged user communities, and is more typical of new listings.

Reddit had endeavoured to bridge the gap between its user base and the financial markets by offering IPO shares to users who held Reddit accounts before January 1st, 2024, through its Direct Share Program. This may have built more of a loyal retail following in the stock, but that is not what dictates long term success.

The opinion on Wall Street regarding Reddit's financial prospects is notably divided. Some analysts project the platform to pivot to GAAP profitability within the ensuing year, whilst others see things very differently. Profitability is often a pivotal marker for assessing the long-term viability of tech companies, especially those, like Reddit, within the growth phase. Growth stocks are also usually some of the first to suffer the consequences of uncertain monetary policy, and the shift in general market sentiment has likely not done RDDT holders any favours.

Looking at the bigger picture, the business fundamentals are more difficult to assess than some its' peers, due in part to the monetisation question. Possessing the 8th most visited website globally, Reddit exhibits significant brand presence and user engagement but a key metric, the price/sales ratio, stands between 8-9x, aligning closely with that of Meta, despite Reddit's relatively lower Average Revenue Per User (ARPU). The company has focused its efforts on enhancing its monetisation capabilities, with advertising earmarked as a pivotal growth driver but this has brought more questions than answers to some concerned.

Reddit's climb to GAAP profitability in Q4 of 2023 marked an essential milestone, reflecting the materialisation of CEO Steve Huffman's strategy for the company. With profitability on the radar, the focus now shifts to sustaining this performance trajectory.

Advertising on Reddit, however, presents unique challenges. The largely pseudonymous nature of its user base complicates targeted advertising—the lifeblood of competitors like Meta. To circumvent this hurdle and diversify revenue streams, Reddit has inked content licensing agreements with tech titan Google and media intelligence firm Cision. The deals, cumulatively valued at $66 million annually, signal Reddit’s commitment to bolstering profitability through strategic partnerships.

Yet, not all is smooth sailing for Reddit. The company faces the typical post-IPO risk of share lockup expiration 180 days after its public offering, an event that can precipitate stock price volatility as early investors gain freedom to sell their stakes.

For investors, the recent pullback from IPO frenzy to more temperate stock prices may be an opportune moment to analyse the company fundamentals and take some time to understand what the future may have in store. With earnings not due until May 7th likely to be keenly watched by the community, there is plenty to look over in the interim.