Reddit Stock: Top 7 Bull vs. Bear Discussions

Reddit (RDDT) has become a prominent topic among investors, inciting discussions about its growth potential and challenges.

In a recent note to clients, analysts from Needham & Company highlighted the seven key bullish and bearish points that investors are currently weighing. Here’s a summary:

Bullish Points

Expansive and Rapidly Growing User Base: As of June 2024, Reddit reported 342.6 million weekly active users, a 57% year-over-year increase, along with 91.2 million daily active users. This growth is indicative of a robust platform ecosystem, which investors view as a positive sign for potential advertising revenue increases. The expanding user base is anticipated to enhance ad monetization, with growth accelerating over the past five quarters.

Community Engagement Growth: Needham noted that Reddit boasts over 100,000 active subreddits, creating highly engaged user communities. These subreddits are seen as valuable territory for targeted advertising and data licensing, forming a significant barrier for competitors. Investors appreciate this unique structure, which they believe enhances user retention.

Data Licensing Opportunities: Reddit saw a remarkable 690% year-over-year increase in data licensing revenue in Q2 2024, largely attributed to a partnership with OpenAI and collaboration with Google’s Gemini. The firm asserts that Reddit’s conversational data is particularly valuable for AI language models, suggesting that this segment could grow from an estimated $100 million in 2024 to over $500 million annually.

Margin Potential: Reddit’s operating leverage is viewed as a vital element, with the fixed-cost business model allowing user growth to translate directly into revenue growth. This could mean a substantial increase in EBITDA margins from 16% in 2024 to over 40% by 2030.

Vast Total Addressable Market (TAM): The global advertising market is anticipated to surpass $1 trillion in 2024, with Reddit currently capturing only 0.1%. This small share indicates considerable growth potential as the platform seeks to increase its advertising revenue.

International Revenue Prospects: Approximately 50% of Reddit’s users are located outside the U.S., yet only 19% of its revenue is derived from these regions. The introduction of translation tools in 35 new countries is expected to further unlock revenue opportunities from non-English-speaking markets.

Valuable Human-Generated Content: Needham emphasized that Reddit is recognized for its authentic content, making it a preferred platform for market research and crisis management.

Bearish Points

Concerns About Profitability: Investors are cautious about potential threats to Reddit’s profitability, citing rising competition, economic challenges, and potential declines in advertising demand.

Monetization Challenges: Despite recent successes, Needham pointed out that Reddit’s monetization efforts are still relatively nascent. Scaling these efforts may prove difficult, especially considering the platform’s nearly two-decade history.

Dependence on Google: Reddit’s traffic significantly relies on Google Search, with 1.3 billion visits stemming from search results in April 2024, leading to vulnerability regarding changes in Google’s algorithms.

Concentration Risk: The top ten advertisers accounted for 26% of Reddit’s total revenue in 2023. This concentration poses risks if any of these major clients decide to reduce their spending.

Volatility Linked to Meme Stocks: Reddit communities have been involved in notable meme stock scenarios, such as the GameStop short squeeze, raising concerns about stock volatility and potential regulatory scrutiny.

Late Entry into Video Content: Needham criticized Reddit’s delayed entry into the video segment, suggesting that creating a competitive video product could heighten costs and risks for the platform.

Moderation Issues: The platform’s reliance on unpaid subreddit moderators is seen as a double-edged sword. If moderators request compensation or withdraw their involvement, the quality of content moderation may decline.