Should You Invest in RDDT?

Summary

Reddit's IPO has attracted many new investors, but it's important to be cautious as the company faces volatility and domestic bias. The platform's revenue primarily comes from advertising, with a unique user base that doesn't overlap much with other social media, making it appealing to advertisers. However, Reddit faces challenges in monetizing its international user base and its dependency on Google. The company's valuation is high, and it's not clear if it fits into the categories of stocks that the speaker typically invests in, raising questions about its long-term investment appeal.

Takeaways

• 🚀 Reddit's long-awaited IPO has attracted many new investors, potentially due to domestic bias and the platform's user base.
• 💡 New investors should be cautious, as IPOs are volatile, especially those with significant hype around them.
• 📈 Reddit's stock ticker is RDDT, and it has seen substantial trading activity, with a peak of 70% over its initial price offering.
• 👥 Reddit's user base is substantial, with 36.4 million logged-out users and 36.7 million logged-in users, indicating potential for monetization.
• 🌐 Geographical differences in user value are evident, with users from the United States being more monetizable than those from other regions.
• 📊 Advertising is Reddit's primary revenue source, accounting for 98% of revenues, but the company is diversifying into data licensing and user economy monetization.
• 📈 Reddit's revenue growth is slowing, but gross margins are high, suggesting potential for profitability with cost adjustments.
• 💰 Despite not being profitable, Reddit has a significant cash reserve and a low cash burn rate, providing a runway for growth.
• 🔍 The platform's appeal to advertisers is strong, with a unique demographic and high use of first-party data for targeted ads.
• 🌐 International revenue is a challenge for Reddit, as the percentage of total revenues from international users has decreased.
• 🤔 The transcript suggests skepticism about Reddit's business model and valuation, not fitting the criteria for the speaker's investment strategy.

Q & A

What is Reddit's current status in terms of its Initial Public Offering (IPO)?

Reddit's long-awaited IPO has finally taken place, with the ticker symbol RDDT. The stock has experienced significant volatility, trading up to 70% over its initial price offering of $34.

What potential issues do new investors face when considering Reddit as an investment?

New investors should be cautious due to the inherent volatility of IPOs, especially those that are highly hyped. Additionally, investors should avoid domestic bias and focus on the merits of the investment rather than just the functionality of the platform.

How does Reddit's business model primarily generate revenue?

Reddit's business model primarily generates revenue through advertising, which accounted for 98% of its revenues. However, they are diversifying to include data licensing and a user economy as part of their multi-chapter growth strategy.

What is the significance of Daily Active Unique Users (DAQ) for Reddit?

DAQ is a strategic metric for Reddit, representing the number of individuals who have opened the Reddit application at least once during a 24-hour period in the last quarter. It indicates the active user base and is crucial for revenue generation.

How does Reddit's Average Revenue Per User (ARPU) compare between different regions?

Reddit harvests close to $6 per user in the United States, while the rest of the world generates around $1.30. This disparity highlights that visitors from the United States are more valuable for advertising revenue.

What challenges does Reddit face in monetizing its international user base?

Reddit struggles to monetize its international user base effectively. Despite accounting for 50% of users, international visitors only contributed 18% of total revenues in the last quarter, indicating a lower monetization rate compared to the U.S. audience.

How has Reddit's revenue growth been trending?

Reddit's revenue growth has been increasing, but at a slower pace, with an approximate 20% increase noted. However, the company is still incurring losses, which is common for growth companies.

What are the gross margins for Reddit, and what does this indicate about their potential for profitability?

Reddit's gross margins are upwards of 85%, which is very good. This high margin indicates that there is significant potential for profitability if the company can trim unnecessary costs and focus on performance.

How does Reddit's dependency on Google search impact its business?

Reddit's dependency on Google search is a concern as any changes in Google's algorithms can significantly affect Reddit's user acquisition. The company has recognized this issue and is working to diminish its reliance on search results for traffic.

What are some of the challenges Reddit has faced historically?

Historically, Reddit has faced a roller coaster of scandals over unsavory content, abrupt leadership changes, and user revolts. These distractions have contributed to challenges in content localization and user engagement.

What are the key takeaways for new investors from the video regarding Reddit's IPO and investment strategy?

The video advises new investors to be cautious, focusing on understanding the investment merits rather than being attracted to the platform's functionality. It also emphasizes the importance of diversifying investments and not relying solely on social media platforms like Reddit for investment advice.

Outlines

00:00

📈 Reddit's IPO and Investment Insights

Reddit's IPO, under the ticker RDDT, saw a significant price increase, raising interest among investors, especially Reddit users familiar with the platform. However, the video warns of the inherent volatility in IPOs and the potential for domestic bias among new investors. It highlights the importance of understanding Reddit's business model, including its revenue streams, competitive advantages, and the resilience of its income. The video raises concerns about Reddit's reliance on voluntary moderators and the challenges of monetizing its user base, particularly the non-logged-in users. It stresses the importance of careful investment, noting the risk of focusing on platform functionality over investment fundamentals, and outlines key metrics for evaluating Reddit's financial health and growth potential.

05:02

💡 Investment Strategies and Reddit's Advertiser Appeal

The video shares a humorous anecdote about hiring a Romanian fortune teller to improve investment outcomes, emphasizing the difficulty of beating the market and encouraging viewers to subscribe and support the channel. It transitions to analyzing Reddit's appeal to advertisers, noting its unique user base that is not heavily present on other social media platforms, which makes it attractive for targeted advertising. The segment examines Reddit's revenue sources, focusing on advertising and the potential for future growth through data licensing. Despite the potential, there are challenges in monetizing international users and concerns about the value of Reddit's data as it becomes more widely used.

10:03

🚀 Evaluating Reddit's Growth and Profitability Potential

This section delves into Reddit's financial performance, highlighting its revenue growth but also its slow pace and operational losses. The focus is on the potential for profitability, considering Reddit's high gross margins and areas for cost reduction. It discusses Reddit's financial runway and the importance of focusing on growth over immediate profitability. The segment also critiques Reddit's investing community for often being one-sided and prone to echo chambers, cautioning against taking investment advice from the platform. Additionally, it mentions Wired's article on Reddit, providing insights into challenges faced by the company, such as international expansion and dependency on Google for traffic.

15:04

🔍 Reddit's Valuation and Final Thoughts

The concluding segment assesses Reddit's market valuation following its IPO, using a price-to-sales ratio to compare it to industry averages and deeming it somewhat high but not excessively so. The narrator expresses skepticism about Reddit's alignment with their investment criteria, focusing on dividend and disruptive growth stocks, implying Reddit may not fit these categories. The video ends with an invitation to viewers to explore another video on investment best practices, emphasizing the importance of learning and applying sound investment principles, and reiterates the call to like and subscribe to the channel.

Keywords

💡Reddit IPO

Reddit's Initial Public Offering (IPO) refers to the company going public and offering its shares for sale to the general public for the first time. This is a significant event as it marks Reddit's transition from a privately held company to a publicly traded one, allowing a broader range of investors to own a stake in the platform. The video discusses the hype and potential risks associated with investing in Reddit following its IPO, including the inherent volatility of newly public stocks.

💡Newbie Investors

Newbie investors are individuals who are new to the world of investing. They may lack the experience and knowledge that more seasoned investors have. The video warns these investors to be cautious when considering investing in Reddit, as they might be swayed more by their use and familiarity with the platform than by sound investment analysis.

💡Volatility

Volatility refers to the degree of variation of a trading price series over time as measured by the standard deviation of returns. In the context of the video, it highlights the risk associated with investing in newly public companies like Reddit, whose stock prices can fluctuate wildly shortly after the IPO due to factors like market sentiment and speculation.

💡Domestic Bias

Domestic bias is an investment behavior where investors tend to favor companies or assets located in their own country or region. The video suggests that Reddit's user base might have a domestic bias, leading them to believe that investing in Reddit is a good idea simply because they use and value the platform regularly.

💡Competitive Moats

Competitive moats refer to the sustainable competitive advantages that a company has over its rivals. These can include factors like brand recognition, proprietary technology, or cost leadership. In the context of the video, it's important for investors to understand Reddit's competitive moats to assess the resilience of its revenue streams and its ability to maintain a market edge.

💡Revenue Streams

Revenue streams are the various ways through which a company generates income. For Reddit, the primary revenue stream is advertising, but the company is also exploring other avenues like data licensing and user economy monetization. Understanding the diversity and resilience of these streams is crucial for investors evaluating the company's long-term financial health.

💡DAU (Daily Active Users)

Daily Active Users (DAU) is a metric used to measure the number of unique users who engage with a platform or application each day. In the context of Reddit, DAU is a strategic metric that reflects the platform's user engagement and is a key indicator for potential revenue generation through advertising and other monetization strategies.

💡ARPU (Average Revenue Per User)

Average Revenue Per User (ARPU) is a financial metric that indicates the average revenue a company generates from each of its users over a specific period. It is a critical indicator for companies reliant on user-generated revenue, like Reddit, to assess the effectiveness of their monetization strategies.

💡Data Licensing

Data licensing involves the process of allowing third parties to use a company's data for a fee. In Reddit's case, this means licensing their user-generated content and data to companies developing large language models. This strategy provides an additional revenue stream beyond traditional advertising.

💡Meme Stocks

Meme stocks refer to shares of companies that experience significant price increases and volumes due to hype and social media attention, often detached from the company's underlying fundamentals. The video discusses how Reddit has played a role in propelling meme stocks, which are often driven by bullish sentiment and can lead to speculative bubbles.

💡Gross Margins

Gross margins indicate the amount of profit a company makes after deducting the costs associated with producing or delivering its products or services. High gross margins suggest that a company has significant pricing power and cost control, which is essential for achieving profitability. The video emphasizes the importance of gross margins as an indicator of Reddit's potential to become profitable.

Highlights

Reddit's long-awaited IPO has finally arrived, attracting many new investors due to the platform's perceived value.

New investors should be cautious, especially with the inherent volatility of IPOs and Reddit's hyped-up offering.

Reddit's ticker symbol is RDDT, and it has traded up to 70% over its initial price offering of $34.

Reddit's business model and revenue streams are under scrutiny, with a focus on its domestic bias and user engagement.

Reddit's daily active unique users (DAQ) are a key metric, with 36.4 million logged in and 36.7 million logged out.

Reddit's revenue model relies on increasing user base or extracting more value from existing users, with average revenue per user (ARPU) being a critical indicator.

Reddit's advertising platform is its primary revenue source, with 98% of revenues coming from third-party ads.

Reddit's user demographics are appealing to advertisers, with a significant portion being young, tech-savvy individuals with higher incomes.

Reddit's international user base presents a challenge in monetization, with a discrepancy between user numbers and revenue generation.

Data licensing is an emerging revenue stream for Reddit, as they license their data to companies developing large language models.

Reddit's gross margins are over 85%, indicating strong potential for profitability with cost optimizations.

Despite being unprofitable, Reddit's focus should be on revenue growth rather than immediate profitability.

Reddit's cash burn has decreased, and with a significant cash balance, they have a healthy runway for growth.

Reddit's reliance on Google for user acquisition is a concern, as changes in search algorithms can significantly impact traffic.

Reddit's valuation, based on a price-to-sales ratio, is considered rich but not excessively so compared to industry averages.

The platform's appeal to advertisers is bolstered by the unique audience that doesn't overlap significantly with other social media platforms.

Reddit's history has been marked by scandals, leadership changes, and user revolts, which could be distracting for the company.

The article from Wired provides an insightful analysis of Reddit's IPO filings, revealing the company's challenges and strategies.

Transcripts

reddit's long awaited IPO is finally

here and with that we believe comes lots

of newbie investors and that's because

people who use Reddit on a regular basis

and find Value in the platform are

likely to think that it's probably a

good investment now that's a form of

domestic bias and if you weren't an

investor prior to reddit's IPO you need

to be very careful and especially if

you're an investor in the stock um be

prepared for lots of volatility because

initial public offerings are inherently

volatile especially ones that are hyped

quite a bit or talked about a lot now

reddits IPO by the way the ticker is

rddt has traded up as much as 70% over

its initial price offering of $34 now we

have no dog in the race here um we're

simply interested in looking at what the

thesis is for Reddit I we're

particularly curious about the training

data and um we're also wanting to

understand just what all the hype is

about so um things we want to look at

how does this company make money that

tells us what exposure we're getting in

our portfolios what competitive Moes do

they have how resilient are their

revenue streams and if you're a newbie

investor and you're looking at Reddit um

be very careful because we saw this a

lot with cannabis stocks that um you'll

be attracted to the functionality of the

platform form rather than the merits of

the investment that you're making so

what we want to do here is get in front

of newbie investors and um explore this

uh company a little bit more so how

Reddit Works you're probably familiar

with that one of the top 10 to 20 most

visited sites in the world now they have

60,000 people working for free as

moderators and um that's a little

concern there because these individuals

are going to be very vocal and have

leverage over the company when they want

to um bring about change perhaps to uh

now have multiple Masters right you have

the users of the platform who are

working for free and then you have the

shareholders who are demanding return on

their investment do you have my money so

there are lots of read and go users so

um this metric here is what the company

defines as a very strategic metric and

it's called a daq so a daily active

unique user is someone who has opened a

Reddit application at least once during

a 24-hour period in the last quarter so

logged in folks 36.4 million logged out

36.7 now the logged out people are a lot

more difficult to harvest money from

that's worth noting whilst the logged in

people these are the uh true users of

the platform and you want to see these

numbers go up so on a on a business

model like this there's two ways that

you can increase revenues it's by

increasing your users or increasing the

amount of money you get from your users

we'll look at that in a second what's

called arpu average revenue per user now

the quarterly average this is weekly

usage right so individuals who have uh

opened up Reddit uh in the last week

over a quarter at least in within a

week's time frame of course the number

goes up right and what you can see here

is pretty consistent terms of usage

across their platform about half the

people come from the United States and

half come from the rest to the world and

there's two distinct profiles there when

it comes to harvesting money from these

folks now when we look at average

revenue per user we want to see that

going up though it will likely because

this is largely an advertising platform

hit some sort of plateau the only way

then without increasing users to

increase your average revenue per user

is to run more ads and that'll piss

people off so you have to be very

careful there so there's probably some

ceiling there U one could say based in

this chart maybe it's been reached at

around $3.50 but um what's more

interesting here is to look at that

based on geography so look at the United

States they're harvesting close to $6

per user and then look at the rest of

the world somewhere around a130 and that

holds true in advertising so uh visitors

from India aren't as valuable as

visitors from the United States that's

just how advertising works so when we

look at the what they call the

multi-chapter growth strategy for Reddit

you see advertising there on the bottom

and the Spectrum here shows current

emerging and future so we want to look

at current right so advertising that's

pretty straightforward 98% of the

revenues come from advertising though

next year that's going to change

probably closer to 90% because they're

now licensing their data to companies

that are developing large language

models that's what we're interested

we'll look at that then there's this

user economy uh potential monetization

area that um they'll need to be very

careful there that they don't piss off

their base now before we get into

talking about reddit's business model

more I wanted to uh have a bit of a

public service announcement here so I

worked in Wall Street for over a decade

and I learned that it's very difficult

to generate Alpha 95% of investment

managers can't beat a benchmark in the

long run so you need to get very

creative when you look at beating the

market so what we did is we went on

Fiverr and hired a Romanian fortune

teller now on her last video she did a

psychic audit and said that some of you

watching this video aren't subscribed

and she recommended penalizing your

Alpha as a punishment now I certainly

don't want it to come to that so I just

ask that you all subscribe to this

Channel and it certainly couldn't hurt

to like this video and share it with

your friends as well for those of you

who are wondering um we found that um

her Alpha generating performances on par

if not better than other fund managers

so we don't run ads here at naly and um

we we're really looking for your support

to help grow this channel so reddit's

appeal to advertisers for the last

several years uh as I said 98% of their

revenue was generated from third party

advertising and the interesting bit here

of people who visited Reddit in the

United States many aren't using other

forms of social media so if you look at

this chart here you can see that for

example um

32% of the user on Reddit aren't using

Facebook and then read to the right so

53% aren't using X 87% aren't using

twitch so there's a uh these are unique

this is unique audience for advertisers

to reach and then when it comes to

demographics around 41% between the ages

of 18 to 34 50% male 64% had a household

annual income of $75,000 or more so it

seems to be an appealing demographic to

Target uh of reddit's top 10 largest

advertisers um they only accounted for

around 28% of Revenue in 2022 26 and

2023 so there isn't customer

concentration risk there that's great

and then 90% of their advertisers used

first-party Reddit data from user

activities so they're really looking at

what you're doing on that platform to

Target you with perfect ads and that of

course they're able to sell better and

Reddit can sell ads better that way now

when it comes to International revenues

this is rather interesting last quarter

50% of redditors visited from outside

the United States right like we said the

revenue they brought in was $

44.7 million from outside the United

States now what we can do there is

compare this then to uh these these

other figures here so uh if 98% of

revenues came from advertising and they

had 250 million in Q4 2023 then in

International revenues are 18% of total

revenues yet they account for 50% of

users now they're trying to say that

well that number jumped 22% since the

prior Year yes but if you take that as a

percentage it actually fell so the

percentage of total revenues that they

received this last quarter was uh 18 or

17.88% the previous quarter of last year

uh say the same quarter last year was

18.35%

they're potentially they're going to

have a problem trying to monetize

international business we're going to

talk a little bit more about that in a

second but when we look at data

licensing uh so the idea here is that

the data on reddit's platform because of

their upvote mechanism it sort of acts

like a community notes function to

validate data though you need to be

careful there because if you're a Reddit

user you know how much humor and sarcasm

goes into people's responses at times at

least in the comments section and you

wonder if algorithms are going to be

able to understand that and you also

need to be careful about Echo Chambers

which appear to be prevalent on Reddit

uh these are people not in pursuit of

the truth especially in the investing

Community those people that use Reddit

we found that to be the case now if

everyone uses reddits data it doesn't

offer a competitive Advantage so the

more they license it the less valuable

it becomes presumably now they describe

this as in early stages and we just go

back to that comment that the more you

start selling the less valuable it

becomes and they provide some

information about data licensing so they

entered a contract uh value of $23

million in in terms ranging from two to

three years they expect next year say

this year 66.4 million to be recognized

from that so from data licensing so

around 8% of 2023 revenues if they had

the same revenues this year that's about

8% so not very much you'd expect to have

more revenues this year so data

licensing will actually be less than

that now a lot of people say well

reddit's not profitable true but when

you're looking at growth companies

you're really focused on Revenue growth

and you can see here this is from an

article by wired reddits revenue is up

but growing more slowly indeed so

somewhere around 20% up uh and they are

incurring losses but what you want to

look at here it's very important look at

gross margins that shows you the

potential they have to be profitable so

you see here gross margins upwards of

85% are very good what they can then do

is start trimming the fat so they can

get rid of that divisive employee

research group tripe lose the whole

every employee needs to be seen heard

and valued stuff and and start focusing

on performance seems like a lot of fat

can be trimmed from this company and

bring them to profitability quite

quickly now because they're losing money

you want to say well um how much runway

do they have so we look here net cash

used in operating activities that's the

cash burn right and okay so they burnt

less cash in 2023 that's great 75

million and then you look at the cash on

their balance sheet even before this IPO

of course they'll raise more is $1.2

billion they're just in uh there's no

problems there at all so you would want

them to be focused more on growing than

trying to get to profitability now when

it comes to using Reddit for investing

we found the stock research there is

really one-sided and barly policed and

we've had our own experiences on there

we were attacked one time from all sides

for daring to say that rocket lab was

overpriced so we were spot on of course

it's crickets right nobody comes around

to say oh yes you're actually correct uh

we found largely nothing but bullish

Echo Chambers over there and Reddit has

helped Propel meme stocks which are an

absolute joke and this whole US versus

Wall Street narrative it's naive at best

so it's probably not good to take advice

on investing in Reddit on Reddit but uh

certainly the platform has a lot of good

use now I'm old enough to remember when

wired used to be a good read I'm even

old enough to remember when Vice news

used to be edgy I think they're out of

business now but um I just looked at

wired's page today and they say why and

how wired is covering politics wired

shouldn't be covering politics wired

should be covering technology so they

deviated from that and um it seems like

lots of activists work as journalists

there now but this article from wired

was quite good I was very surprised it's

titled Reddit IPO filings reveal the

company's hopes and fears and this

gentleman here Parish Dave did a great

job on this piece I just wanted to point

to a few things in this article so uh it

talks about how reddits 19-year history

they've been around for a while has been

a roller coaster of scandals over

unsavory content abrupt leadership

changes and user revolts what does that

mean lots of distractions okay that's

problematic he says over the course of

the unusual yearslong delay Reddit

revised its initial investor pitch 10

times and this is important leaving a

trail of edits what you can then do

there is take a look at that you could

do a diff on those and and extract some

really valuable information so that's

what this gentleman did and the IPO

papers have said since late 2021 that

over 500 million people visit at least

once a month but nearly 3 years later

the figure cited hasn't grown and um the

argument was well they they they changed

the way they measure well that isn't

good either the amount of time Reddit

reports that users spend with its

service hasn't significantly budged

either so this is from that wired piece

and Reddit reported that over twoth

third of all two-thirds of all posts in

late 2021 through 2022 were in English

and by the second half of last year that

grew to over 90% so this idea of trying

to appeal to an international audience

what they say localizing your content

has proved to be very difficult they

talk about how logged out users tend to

visit individual posts and then leave

which have fewer ads than news feeds

that logged in users curate and scroll

so going back to that you know the

challenge there of getting people to

actually uh log into the platform and

use it rather than just coming by and um

sapping the content so another concern

there would be their dependency on

Google which is said to have declined so

if Google makes a change in their

algorithms and that affects a Reddit

that's a huge deal they said there was

an all hands on deck emergency when that

happened one time and they vowed to make

sure their dependency on Google was

diminished and um they no longer provide

that but the last report in 2022 said uh

that they had reached an all-time low of

about one in five users coming via

search results now when it comes to

valuation we have what's called our

simple valuation ratio that's market cap

divided by annualized revenues um

obviously Reddit doesn't have positive

earnings so we use this form of a price

to sales ratio uh it comes in at 12 so

that's based on their closing price of

$50 market cap of 9.5 billion that's

twice our catalog average it's quite

Rich to be honest so uh but it's still

not I think three times our catalog

average at 18 would be where we would

draw the line and say well that's too

richly priced but to be honest there's

nothing really appealing about reddit's

business that would make us want to

invest uh we invest in two types of

stocks dividend growth and disruptive

growth and this doesn't seem to be that

disruptive so um I'm going to go ahead

and leave you with another video here to

all the Newbie investors that have come

around thanks for visiting and um if you

want to learn about some best practices

in investing I've put up a video here

this was from uh last year but the um

the message is Timeless and this has

some very good lessons in it so um

please make sure to like And subscribe

to our Channel thanks so much for taking

the time to watch this

today