RDDT Stock: Reddit Might Not Be a Blue Chip, but at Least It’s a Real Business

Stocks to buy

I’ve just finished writing about Trump Media & Technology Group (NASDAQ:DJT), so forgive me if I’m a little snarky. Nothing puts me in a worse mood than writing about a terrible business. While Reddit (NYSE:RDDT) isn’t a blue-chip stock by any means, it is a real business and substantially more valuable than DJT.

Its chances of becoming the next Monster Beverage (NASDAQ:MNST) are slim to none. 

So even though it won’t be the next Monster, the community platform provider has some levers to pull to grow its market capitalization, something I would suggest Trump Media doesn’t have available. But I digress. 

It’s been three weeks since Reddit went public on the NYSE, selling shares at $34. RDDT stock closed the first day of trading up 48% to $50.44. By March 26, it was over $65. It’s still up from its IPO price but down 30% from the end of March. 

I wouldn’t buy Reddit shares, but that doesn’t mean you shouldn’t. Here’s why.     

Data for Dollars

Yahoo could have stayed powerful if AI existed back in the day. Its message boards alone could have supplied all kinds of training for language learning models. Fast forward to today, and that’s what Reddit is doing with all its communities and text, licensing the data to AI companies. 

“‘There’s the new emerging market of AI, where large language models need data to train on,’ Reddit’s Chief Operating Officer Jen Wong told me on Bloomberg Technology. ‘And when you look at Reddit’s corpus, 19 years of human experience organized by topic with moderation and relevance, that’s incredibly important to building both the chat capability and the freshness of information,’” Bloomberg contributor Edward Ludlow wrote on March 22. 

However, as Ludlow points out, the SEC is looking into these arrangements, which should slow the demand for data from third-party AI companies in the near term. In the longer term, once the company comes to an understanding with the SEC on what it can and cannot do,  it should be able to monetize that data. 

Stay tuned.

Digital Ad Business Continues to Grow

As page nine of its prospectus points out, the global digital advertising market is estimated to be $1 trillion, excluding China and Russia, and will grow to $1.4 trillion by 2027. Further, the global search advertising market is expected to hit $750 billion by 2027.

There is no question Reddit has a genuine opportunity to grow its revenues through digital advertising. 

“Advertising is our first business, and advertisers of all sizes have discovered that Reddit is a great place to find high-intent customers that they aren’t able to reach elsewhere. Advertising on Reddit is rapidly evolving, and we are still in the early phases of growing this business,” stated CEO and Reddit co-founder Steve Huffman on page ii of its prospectus. 

When you consider Walmart’s ad business’s recent growth—in 2023, it grew revenue by 28% to $3.4 billion—there is good reason for Huffman to be cautiously optimistic. 

Further, in 2023, Reddit generated $788 million in revenue from ads, about one-quarter of what Walmart generated, a nearly half-a-trillion-dollar company. 

It’s got a shot at the brass ring. 

The Third Revenue Generator 

The third and final revenue stream is what the company calls its “user economy,” where users generate revenue from other users in the communities they frequent. The company has created marketplaces for users to peddle their wares—think of it as a giant farmer’s market.  

This last one is the most difficult to handicap. While it sounds lucrative, Shopify (NYSE:SHOP) likely controls the user economy through its merchant network. 

If done right, RDDT generates tremendous revenue from facilitating commerce through its communities. Pinterest (NYSE:PINS) is doing much with the user economy. It can, too.       

The Bottom Line

As I said earlier, I would not buy it because it loses too much money. However, if I were an aggressive investor and had no problem with losing money as it continues to scale its business, I’d consider buying some shares in the $30s.

To do so, you might sell some Aug. 16 $35 puts. Currently out of the money by 24%, the bid price of $4.00 would generate an annualized return of nearly 26% ($4 divided by the share price of $44.80 times 365 divided by 127), which you’d get to keep if it doesn’t fall below $35 over the next 127 days. If you have to buy the shares, you will pay $31, at the bottom of the range I suggested for buying RDDT stock.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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