Reddit (NYSE: RDDT) entered the public arena at $34 per share on March 21 with a bang. The budding social news platform dazzled the market by opening at $47 and concluding its debut day at $50.44, boasting an $8 billion market cap. Although this figure is dwarfed by the likes of the sprawling social media behemoths such as Meta Platforms (NASDAQ: META), Pinterest (NYSE: PINS), and Snap (NYSE: SNAP), Reddit’s trajectory piques the curiosity of investors.

Steered by frenzied speculation, will Reddit’s growth arc mimic Meta’s soar or fizzle out like Snap, still lingering far below its initial public offering (IPO) mark?

Image source: Getty Images.

Unveiling Reddit’s Revenue Streams

Reddit’s fourth quarter of 2023 catered to 73.1 million daily active unique users (DAUq), with nearly half hailing from the U.S. Dividing its users into the logged-in and logged-out segments, Reddit endeavors to coax its passive viewers (logged-out users) to morph into active participants (logged-in users) who curate content. A momentum surge emerges in Reddit’s year-over-year uptick in DAUq users over recent quarters, with its logged-in users steadfastly constituting half of its daily audience.

Data source: Reddit S-1 filing.

Reddit’s narrative is entwined with growth, yet it forewarns of potential DAUq fluctuations precipitated by external jolts like the COVID-19 pandemic, WallStreetBets saga, Russo-Ukrainian War, and blockbuster game launches. These transient spikes have set Reddit up for demanding year-over-year comparisons.

Like Meta and Snap, Reddit’s revenue mainstay is advertisements, gauged by its average revenue per user (ARPU). Despite this, its ARPU growth trajectory has markedly decelerated over the past few quarters.

Data source: Reddit S-1 filing.

The U.S. ARPU stalling drove Reddit’s deceleration, juxtaposed against the global ARPU ascent elsewhere. With U.S. users yielding significantly higher ARPU compared to non-U.S. users, Reddit’s slippage is spurred by overarching industry challenges.

Parallels can be drawn to Meta as its relentless ARPU climb reached 21% in Q4 2023, outshining its trajectory through every quarter in the last year. This distinct context hints that Reddit’s ails could be endemic to its domain.

Emergence of the Social Media Giant?

In a fiscal panorama, Reddit’s revenue swelled 21% to $804 million in the previous year. It whittled its net loss from $159 million to $91 million, with an improved adjusted EBITDA from negative $109 million to $69 million. These figures delineate Reddit more in the Snap mold, unreeling a narrative far from Meta’s era of robust GAAP profitability post-IPO a decade ago.

Nonetheless, Reddit deviates from the traditional social network guise, donning the cloak of a diversified news hub and discussion corridor, sparring not only with social platforms but also search engines and peer-to-peer marketplaces. Additionally, Reddit contends with AI rivals like OpenAI’s ChatGPT, raising concerns about efficient information relay on its subreddits against AI-driven responses.

Revenue-wise, Reddit’s positioning mirrors Meta’s epoch back in 2009 when it was Facebook, which harvested $777 million with 360 million monthly active users (MAUs). However, Meta’s meteoric growth propelled by a compound annual growth rate (CAGR) of 44.5% over the ensuing years to accrue a staggering $134.9 billion, now embracing nearly 4 billion users across its app economy.

A Challenge Beyond the Niche

Steering into 2024, Reddit aims to hike its revenue by a minimum of 20% and perch on the cusp of a breakeven adjusted EBITDA. These are pertinent strides, albeit Reddit grapples with the imperative to diversify its ecosystem, swell its logged-in user cohort, stay agile amidst evolving AI dynamics, and solidify an unpaid moderator-centric edifice.

Should Reddit not decipher these knotty challenges and surpass its niche enclosure, its route may diverge from Meta’s grandiose journey, veering closer to Snap’s trajectory if it fails to stabilize revenue growth and profitability. Investors, thus, stand advised to scrutinize Reddit’s operational bedrock before chasing its IPO frenzy.

Contemplating a $1,000 Bet on Reddit?

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Randi Zuckerberg, the former Facebook market development luminary and sibling to Meta Platforms czar Mark Zuckerberg, sits on The Motley Fool’s directorial board. Leo Sun is vested in Meta Platforms. The Motley Fool’s interests orbit Meta Platforms and Pinterest, with a guardedly transparent policy.

The author’s expressions herein are personal and do not mandate alignment with Nasdaq, Inc.’s views or opinions.