Reddit: Traffic Surge Justifies This Rally (NYSE:RDDT)

Meme stocks are back, with the investor Keith Gill (better known as “Roaring Kitty”) back on Reddit (NYSE:RDDT) promoting GameStop (GME). Though news of this broke after the close of Reddit’s first quarter, we were already seeing tremendous traffic growth from the company, which has helped to boost revenue growth rates as well.

Since its IPO in March, which largely fizzled, Reddit has now done a complete 180-turn and leaped ~20%. To me, however, this is just the start of a longer breakout for this stock.

I last initiated Reddit at a buy rating in April, when the stock was still trading near ~$45 and before the company’s surprise Q1 blowout quarter. In light of the strong traffic trends which I think can be sustained (especially as there is an element of inbound traffic boosting from Google – more on this in the next section), I am reiterating my buy rating on Reddit.

Summing up all the reasons to be bullish on Reddit:

• Differentiated social media platform versus peers. Reddit focuses less on pictures, videos and personal promotion; and rather on discussion boards and topics of interest. In a way, Reddit is picking up steam where X (formerly known as Twitter) has lost ground ever since its acquisition by Elon Musk.
• Small base with room to grow. With “only” ~80 million DAUs (versus ~2 billion for the goliath in the industry, Meta (META), Reddit still has plenty of unrealized market opportunity.
• Opening up new paths to monetization. Like most social media companies, Reddit generates the majority of its revenue from selling advertising space. But like X, the company has also started selling a data licensing feed as well as setting up a user e-commerce ecosystem to drive more revenue.
• Already profitable. Reddit, despite its massive current growth rates, is already generative positive adjusted EBITDA.

We do have to watch out for Reddit’s valuation. At current share prices after the rally near ~$60, Reddit trades at a market cap of $9.96 billion. After we net off the $1.67 billion of cash on Reddit’s most recent balance sheet (which includes proceeds from the IPO), its resulting enterprise value is $8.29 billion.

Meanwhile, for FY25, Wall Street analysts are currently expecting Reddit to generate $1.32 billion in revenue, or 21% y/y growth. This pitches Reddit’s valuation at 6.3x EV/FY25 revenue. The key to Reddit maintaining this valuation multiple will be for the company to prove that its 40%+ growth rates from the most recent quarter can be sustained throughout the year; or if it falls back down to growth in the mid-20s (which, if so, the stock is trading comparably or slightly more expensive than other ~20% growth stocks in the tech sector).

It’s my belief, however, that recent trends can certainly be sustained – we’ll dig into Q1 results next.

Q1 download

The snapshot below showcases Reddit’s Q1 results:

Reddit’s revenue in the first quarter soared 48% y/y to $243.0 million, accelerating sharply over 25% y/y growth in Q4 and 23% y/y growth for the whole of FY23.

The uptick, meanwhile, was driven primarily by an increase in users and user engagement, partially offset by slightly softer ad pricing (similar to what other companies in the industry are observing; as companies have pulled back on sales and marketing budgets, ad pricing has started to soften again).

DAUs in Q1 grew 37% y/y. Logged-in DAUs, meanwhile, which represent roughly half of the total, grew 27% y/y.

What draws me to Reddit versus other social media competitors is that Reddit is growing fiercely in the U.S. (whereas other platforms like Pinterest (PINS) and Snap (SNAP) are barely able to sustain any growth at all domestically). Meanwhile, for Reddit, total DAU U.S. growth of 45% y/y is outpacing international markets.

And despite softer ad pricing, higher engagement (i.e., more impressions served per user) is still bringing ARPU up by 8% y/y globally.

Two core factors are driving the improvement for Reddit. The first: the company has sped up a lot of its platform, which it said helped it to favor better in Google search rank algorithms. Importantly, the company believes this is not a one-time spike. Per CEO Steve Huffman’s remarks during the Q&A portion of the Q1 earnings call:

Web performance also has been driving an increase in traffic from Google, which is driving the increase largely in the logged-out users. But logged-in users, which is the core of our business, the bedrock of our inventory is also up 27% year-over-year.

And the growth there is really driven by improvements to product quality. So the sign-up has gotten much more efficient, onboarding has gotten better than home feed relevance for users, finding content that’s relevant to them in their first session on Reddit. We’ve gotten much more effective at that.

We feel confident looking forward because the growth that we’ve seen isn’t a — it’s not like a onetime spike. We’ve been adding users very consistently for the last year, roughly two million users a month, seven of the last 10 months, and one million users in eight of the 10 last month. And so long story short, our work is working of focusing on product performance and quality, and that’s driving retention”

The second driver is international expansion. The company has deployed machine learning models to start automatically translating its content (largely in English at the moment) into French, with more languages on the roadmap soon. On a nominal basis, international represents less than one-quarter of total revenue, so this push to get Reddit into more eyeballs across the globe will be an important, sustainable driver of growth going forward.

And on the profitability front, note that Reddit’s ~89% pro forma gross margins have helped the company leverage incredible top-line growth into strong profits. Adjusted EBITDA climbed to $10.0 million, or a 4% margin – versus a -31% margin in the year-ago quarter.

Key takeaways

Soaring user growth, international translations underway, faster platform that is leading to more inbound Google traffic, and rapidly scaling profits – there’s a lot to like about Reddit, and a lot with which to justify the recent rally. Keep an eye on the company’s growth rates and valuation multiples as it moves into Q2 and beyond, but stay long here.