Over the past six months, Reddit’s stock price fell to $160.34. Shareholders have lost 19.4% of their capital, which is disappointing considering the S&P 500 has climbed by 5.1%. This might have investors contemplating their next move.
Following the drawdown, is this a buying opportunity for RDDT? Find out in our full research report, it’s free.
Why Are We Positive On RDDT?
Founded in 2005 by two University of Virginia roommates, Reddit (NYSE: RDDT) facilitates user-generated content across niche communities (called subreddits) that discuss anything from stocks to dating and memes.
1. Domestic Daily Active Visitors Skyrocket, Fueling Growth Opportunities
As a social network, Reddit generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.
Over the last two years, Reddit’s domestic daily active visitors, a key performance metric for the company, increased by 15.9% annually to 52.5 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.
2. Eye-Popping Growth in Customer Spending
Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Reddit’s audience and its ad-targeting capabilities.
Reddit’s ARPU growth has been exceptional over the last two years, averaging 45.1%. Its ability to increase monetization while growing its domestic daily active visitors at an impressive rate reflects the strength of its platform, as its users are spending significantly more than last year.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Reddit has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the consumer internet sector, averaging 25.7% over the last two years.
Final Judgment
These are just a few reasons why we think Reddit is one of the best consumer internet companies out there. After the recent drawdown, the stock trades at 21.8× forward EV/EBITDA (or $160.34 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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