Founded in 2005, as the internet went from dial-up to broadband, Reddit Inc. (NYSE: RDDT) has been called the “front page of the internet.” It was and remains a place where people post news stories (fake or real) and millions of opinions. It was eclipsed over the past two decades by X (aka Twitter), Facebook, and a group of smaller social media. However, it has lived on long enough to go public eventually. At $7 billion, its market cap is considered rich by many investors. That is, perhaps, why its stock has done poorly relative to the hype ahead of the initial public offering. There is speculation about what happens to shares next.
Reddit may not recover from a sell-off that took the shares from a post-IPO high of $74 to $47. It has never made a profit, which may be one reason. Last year’s revenue barely topped $800 million, which means it trades at almost 10 times its revenue. That revenue is up 20% from the year before. However, growth from such a small revenue base would have been better if management had known how to monetize users.
Reddit’s investors received unwanted attention, which may be why the stock tanked. Small hedge fund and short seller Hedgeye Risk Management said it had taken a short position. According to The Information, “its engagement and monetization rate didn’t justify its stock’s premium valuation at around 14 times sales.” Typically, a negative call from a tiny hedge fund would have less effect. Yet, enough investors saw the wisdom to dump Reddit shares.
Reddit’s hurdle is to prove that its management knows how to monetize and that it can quickly generate annual revenue of over $1 billion—and, of course, make a profit.
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