Reddit (RDDT) earnings writeup
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My investment portfolio is up +197.2% in 2024, after being up +134.7% in 2023; now up more than 3,000% since January 2020 when I got back into investing full-time.
Here’s my investment strategy which focuses on high-quality growth stocks… I own 15-20 core holdings (great fundamentals, compelling valuation) plus another 5-10 non-core holdings (good fundamentals, reasonable valuation) plus another 5-10 swing trades (good fundamentals, reasonable valuation, compelling technicals).
As long as the fundamentals remain strong and valuation remains compelling/reasonable, then I’ll add on pullbacks.
I only want to own stocks that have at least 50% upside within the next 1-2 years and at least 100% upside within the next 3-4 years.
My objective is to maximize the upside in good markets and minimize the downside in bad markets. I accomplish this by being very selective with my stock picking and disciplined on valuations while using a variety of hedging strategies to protect my gains in market downturns.
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RDDT Q2 earnings report: https://investor.redditinc.com/news-events/news-releases/news-details/2024/Reddit-Announces-Second-Quarter-2024-Results/
RDDT Q2 shareholder letter: https://s203.q4cdn.com/380862485/files/doc_financials/2024/q2/Q2-2024-Shareholder-Letter.pdf
RDDT Q2 10K: https://s203.q4cdn.com/380862485/files/doc_financials/2024/q2/04d62450-250b-47c1-9af2-5f7aac9f4d40.pdf
RDDT Q2 earnings webcast: https://events.q4inc.com/attendee/596842340
RDDT Q2 webcast transcript: https://s203.q4cdn.com/380862485/files/doc_financials/2024/q2/Reddit-Q2-24-Earnings-Call_Transcript.pdf
Introduction
Reddit has been around for almost 20 years and has grown to become the largest forum on the internet, offering a very different experience and level of content compared to Facebook, Twitter, Instagram, Snapchat and so on.
Unlike traditional social media platforms built around friends, followers, family, and famous people, Reddit focuses solely on communities and is not driven by algorithms. Anything that becomes popular on Reddit is because of community voting.
Every post and comment on Reddit starts at 0 points. To become popular on Reddit, a group of like-minded users must upvote the post or comment. This system aims to ensure that the content on Reddit is more authentic and higher-quality which means the best content should rise to the top and get the most attention.
Deeper conversations are Reddit’s superpower. The company has built a multi-billion dollar business from its conversational-first content approach however the monetization of this content is still in the very early stages.
Reddit introduced the first version of its adtech platform in 2018. After a significant redesign that year, Reddit started to offer more advertising capabilities on its platform and explore new ways to monetize its rapidly growing user base.
From just tens of millions of revenue in 2018 to an estimated $1.2 billion in 2024, Reddit has seen exponential growth in its advertising business yet it’s still tiny compared to giants like Facebook (owns Instagram and WhatsApp) which will do $160+ billion in revenues this year.
With all the improvements the company is making to their adtech platform and new opportunities like the developer platform, paid subscriptions to unlock premium features and data licensing — I believe RDDT has the potential to be a significant winner for shareholders over the next 3-5 years.
Conservatively, I think Reddit gets to $3+ billion in CY2028, perhaps closer to $3.5B which would put them within reach of $4+ billion in CY2028 — however we still need to see more traction in their advertising and subscription businesses plus data licensing is still an unknown and the heavy reliance on Google Search for traffic is a risk if anything ever changes with that relationship and/or the Google algorithms.
If RDDT does $3+ billion in revenues in CY2029 with 30% free cash flow margins then I think the stock could have ~200% upside over the next ~5 years.
Assuming Reddit can keep growth for the next 3-5 years in the 20-25% range while increasing net income margins by 150-200 bps per year, then the stock trading at less than 34x NTM EBITDA is somewhat compelling to me.
I think RDDT had one of the best Q2 earnings reports that nobody is talking about and that’s why I’ll be adding to my position on any pullbacks, especially now that the post-IPO-lockup has passed so any insiders looking to dump their shares could have already done so. I suspect many of those insiders still see massive opportunity on the horizon and therefore will hold onto their shares.
I think there’s a 15% chance we see Google (GOOG) try to acquire RDDT in the next 12-18 months especially if they wanted to keep the Reddit data away from other LLMs