Reddit: Social Media Gem or Risky Bet?

Social media has undoubtedly been one of the biggest new industries of the past 20 years.

From the internet’s earliest days, socializing online was a key activity. Think open forums like USENET, chatrooms like IRC, or messaging apps like AIM. These were popular but limited—mostly one-on-one or small groups, with little reach or the viral "network effects" we see today.

Then came Friendster and MySpace, proving social platforms could scale to hundreds of millions of users.

But it wasn’t until Facebook opened up in the late 2000s that social media’s economic power really clicked. Linking real identities to personal interests created an ad goldmine. Even now, Facebook pulls in nearly $40 per user annually—more than any rival—and delivers some of the best returns for ad spending anywhere.

Today, I’m diving into a newer Green Screen social media stock that went public last year: Reddit (RDDT). Let’s explore if it’s a smart investment.

Reddit’s Business

You’ve probably heard of Reddit. It’s like a modern USENET—users sign up for free, then post, comment, and upvote or downvote content across countless topics, each grouped into a “subreddit.” With nearly 140,000 subreddits, it covers everything from broad interests like Apple or gaming to quirky niches like pocket knife trading or Casio watch collecting.

Volunteer “super-users” moderate each subreddit, keeping posts on track and curbing spam or abuse. This setup mirrors old USENET groups and costs Reddit nothing—a big win for efficiency.

Reddit makes most of its money—92%—from ads, which thrive thanks to its topic-focused structure. The rest comes mainly from licensing post data for AI training or search engines, with a tiny slice from $50/year premium subscriptions for an ad-free experience and exclusive subreddits. About 82% of revenue flows from the U.S.

With just over 100 million daily active users, Reddit saw 550 million posts and 2.72 billion comments in 2024. It went public almost exactly a year ago, on March 20, 2024.

Growth Outlook and Revenue Recurrence

Reddit’s growth is firing on all cylinders. Sales jumped nearly 62% in 2024, with Q4 soaring 71%. Analysts and the company expect 30%+ growth yearly for the next two years.

This isn’t just luck—it’s organic. Daily active users rose 39% last year, while average revenue per user climbed 23% to over $16. Data licensing is a growing star, nearing a $100 million annual run rate.

Reddit’s far from tapped out. Its 100 million daily users pale next to Pinterest (~400 million), X (~430 million), or Instagram (1-1.2 billion). It’s betting big on AI to translate content and grab a global audience—smart, since less than 20% of revenue comes from outside the U.S.

Plus, Reddit’s platform can grow forever. Anyone can start a subreddit for the latest trend or hobby, setting it up to become a worldwide go-to for news and chat.

As for recurring revenue, I generally consider ad networks as a "toll-booth" style revenue model. Certainly volume of ad spend will ebb and flow with economic conditions, but advertisers do generally pay the firm over and over again in a recurring manner.

Moat

Reddit’s user retention is top-notch. Its mix of niche and general subreddits keeps people coming back—half log in daily, 95% monthly, matching or beating X and Pinterest. Users spend about 30 minutes a day on it, with veterans staying even longer. That’s a seriously “sticky” platform.

Like most big social networks, Reddit’s strength is its network effect. Users return for news and talk on every interest imaginable. Advertisers pay to reach those niche crowds, and data buyers shell out for the posts and comments. It’s a self-reinforcing cycle that’s tough to crack.

Barriers to entry help, too. Topical discussion isn’t crowded in social media—Facebook Groups and X Lists exist, but they’re less organized and moderated than Reddit’s subreddits, and have less content in general. Matching Reddit’s billions of posts and comments would take competitors years.

The network effect and unique content make Reddit’s moat pretty solid.

Management and Financials

Reddit is a founder-led company. Steve Huffman started it in 2005, ran it for a year, then sold it for about $20 million, staying on as CEO. After leaving in 2009, he returned as CEO in 2015. Since then, he’s tackled mobile apps, moderation disputes, and API pricing shifts, steering Reddit to a strong IPO last year. The stock has increased 300% in value since then.

Huffman owns 3.3% of Reddit—worth about $765 million at today’s price—tying his success to shareholders.

Financially, Reddit looks solid. Gross margins are stellar at over 90%, up from 84% a few years back. It’s debt-free, sitting on $2.2 billion in cash. After burning cash in 2023, it flipped to $215 million in free cash flow last year—a 16.6% margin. These are very healthy financial metrics.

Risks

I’d rate Reddit a “medium-high” risk investment.

Its heavy reliance on ads makes it shaky in downturns. A recession could hit harder than platforms leaning on subscriptions.

Volunteer moderators are a double-edged sword. They keep the site tidy for free, but they’re outside Reddit’s control. Take the 2023 “blackout”—over 8,000 subreddits went dark protesting API price hikes. Plus, mods enforcing their own views can spark censorship claims or bias accusations against the company at large.

Generative AI threatens Reddit’s niche as a Q&A hub. Why browse for vintage sneaker tips when ChatGPT, trained on Reddit’s own data, can answer instantly?

Google drives a chunk of Reddit’s traffic. An algorithm tweak or AI-driven drop in search volume could dim its visibility and slow growth.

Finally, the stock is pricey—over 17 times sales at $128.21. Patience is key to snag it at a better value.

Conclusion

Reddit is a strong social media play. It has a big user base that’s still expanding, solid retention, tough-to-beat moats from its content and network effects, a founder at the helm, and rock-solid finances. It’s an easy pick for the Watch List.

So, what’s a good buy price? I modeled 27% yearly revenue growth for five years, a 30% free cash flow margin, and 11.5% annual dilution—bold assumptions. Discounting at 11.5% (a high rate), I get a $100/share target. At $128 today, even after a dip, it trades a good bit above that. Let’s keep it on the Watch List and wait for a better deal.