During the September 17 episode of Mad Money, a caller asked why Reddit, Inc. (NYSE:RDDT) has remained range-bound and gradually drifted downward despite a long-term bullish outlook. Jim Cramer replied:
Alright, my take is that this is a $29 billion company. I think that there are companies that would pay $40 billion for just the book of business they have and be able to train all their different viewers and readers. Buy Reddit, period, end of story. Buy Reddit.
Reddit Posts Strong Second-Quarter Growth
Reddit, Inc.’s second-quarter results provide strong financial support for the growth argument. Revenue rose 61% year over year to $805 million, advertising revenue increased 64% to $762 million, and adjusted EBITDA more than doubled to $343 million. Daily active uniques increased 18% to 130.3 million, while weekly active uniques rose 24% to 514.6 million. The company also forecast third-quarter revenue of $860 million to $870 million and adjusted EBITDA of $385 million to $395 million.
At the September 8 Goldman Sachs Communacopia + Technology Conference, CEO Steve Huffman said, “What is most valuable to Reddit is bringing users into the Reddit ecosystem. We want to grow our direct user base. That is where our business lives.” He also discussed the company’s efforts to grow its direct user base and convert mobile-web users into app users.
Bear Case: Traffic and Valuation
A risk worth mentioning is the composition of Reddit, Inc.’s user growth. U.S. daily active uniques increased 6% year over year to 53.2 million in the second quarter, while logged-in U.S. daily active uniques rose only 1% to 23.1 million. International daily active uniques increased 28% to 77.1 million. Reddit reported second-quarter average revenue per unique of $11.85 in the U.S., compared with $2.26 internationally. Huffman said on September 8 that “traffic that is logged out or transient is just less meaningful to us,” while Reddit is focused on growing its direct user base. He also said the company was continuing to work on converting mobile-web users into app users.
Valuation seems to leave less room for a slowdown. The company closed at $152.83 on September 17, giving it a market capitalization of approximately $29.4 billion. It also has a forward P/E of 23.31 as of September 17. The company is also investing heavily in its product. Huffman said the company considers its feed technology roughly 12 to 18 months behind the state of the art and that improving the feed is among its most important priorities over the next 12 to 18 months.
Hedge Funds Increase Their Reddit Exposure
At the end of the second quarter, 91 hedge funds held Reddit up from 70 in the first quarter, as per Insider Monkey, which tracks more than 1,000 hedge funds. Of those hedge funds, Jericho Capital Asset Management was the one of the largest shareholders and initiated its position in Q2 with 3.33 million shares. Additionally, the short interest was roughly 14%–15% of the float. Cramer is focused on what Reddit, Inc.’s audience and data could be worth to a strategic buyer. The financial debate is if the company can convert more of its large audience into direct users and sustain the growth rates reflected in its current guidance while the stock carries a market value of roughly $29.4 billion.
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