Growth-focused investors might find Reddit an appealing pick.
Initial public offerings (IPOs) can be great opportunities for investors. After all, getting in on a stock on the ground floo — or close to it — can be an excellent way to generate big returns over time. However, not all stocks go on to be winners after their debuts.
Take Reddit (RDDT 2.06%), for example. Its IPO this spring drew considerable enthusiasm. But the stock has charted a volatile course since then, and it’s natural to question: Is it a buy now or not?
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What does Reddit do?
Reddit operates an online message board platform where users post questions and answers on an endless variety of topics. The company was founded in 2005, and its stock has traded on the New York Stock Exchange since March 20.
It generates most of its revenue through the sale of ads on its platform. In the second quarter, Reddit took in $281 million in total revenue, of which $253 million, or 90%, came from advertising.
Like so many social media companies that rely on ad sales, the key to Reddit’s success lies in its ability to attract and retain eyeballs. On that front, the company reported 91 million daily active users (DAUs) during Q2. That figure was up 51% from the same period one year ago.
While 91 million DAUs is impressive, it’s still way below many of Reddit’s social media competitors. For example, Snap reported 432 million DAUs in its most recent quarter. Meanwhile, the king of social media stocks, Meta Platforms, boasts 3.3 billion DAUs.
In other words, Reddit has a long way to go. Nevertheless, its user growth has been impressive, and revenue is also increasing at a steady pace.
Is Reddit a buy now?
First off, let’s be clear: Since Reddit has generated no profits in its time as a public company, its stock will be inappropriate for certain types of investors and portfolios. Chiefly, value investors and income-oriented investors will want to steer clear — at least for the time being.
Reddit is a growth stock. While it generates little free cash flow, books no profits, and pays no dividends, growth-oriented investors may be intrigued by its potential, thanks to its sizable and growing user base. And while the company doesn’t generate much in the way of free cash flow, it does generate some. In the second quarter, Reddit reported $22 million in free cash flow. That’s important primarily because it’s a positive figure. In other words, Reddit is not blowing through its cash holdings to support its operations. What’s more, the company has an ample cash stockpile. It reported $1.7 billion in cash and equivalents on its books as of the end of last quarter, with only $28 million in debt.
For a young unprofitable company, both cash on hand and positive free cash flow are important, as they give the company time to grow its business without having to borrow money to support operations.
In summary, growth-oriented investors might want to consider Reddit, particularly if the company can continue to demonstrate strong revenue and user growth in the coming quarters.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Snap. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.