After its March 21 debut, Reddit (NYSE:RDDT) more than doubled from its IPO price. Early investors benefited from rapid growth and a successful IPO. RDDT stock has since declined significantly. While it still trades roughly $10 higher than its $34 per share offering price, it’s one that’s got some downside momentum investors have to consider.
With a key Q1 2024 earnings report on tap for investors on May 7, there will be plenty to watch. Here’s what investors hope for good news from the social media company will want to consider, and why I think it may simply be best to wait on the sidelines until the numbers have been released.
Earnings Report on May 7
Reddit will release its first-quarter earnings report on May 7 after the market closes. Analysts are expecting -$2.34 in earnings per share for this quarter, with advertising revenue growth likely the key focus for many investors.
Analysts expect the company’s advertising sector to see significant growth, particularly with recent strategies put in place by Reddit’s management team to monetize its existing user base.
This advertising segment is expected to reach $870.9 million in revenue over the next three years. That would represent significant growth from 2002 numbers of only $601.8 million.
Investors are excited about the potential growth and high-margin opportunities in other areas like data monetization. We’ll have to see how much progress has been made in this regard.
Most analysts view RDDT stock as a buy heading into this print, with an average price target around $50 per share. The thing is, those numbers could change drastically after the print, and I expect some key analyst updates to follow this release.
What Makes RDDT Stock a Buy
Launched in 2005, Reddit became a general platform for various online communities called Subreddits. As of 2023, more than100,000 Subreddits have been created, propelling Reddit to become one of the most-viewed social media platforms in the key U.S. market.
Reddit has been a major player in meme stock hype and trends. The platform reached 73.1 million daily active unique users in 2023, higher than the previous year’s 57.5 million.
If we do see this recent meme stock/meme crypto rally continue, there’s obvious upside here for Reddit.
The company’s recent financial performance is also worth noting. Revenue growth has been strong, but profitability has lagged. If the company can show improved profitability (which shouldn’t be hard, given the company’s gross margin of around 86%), investors may reward the stock.
The question is just how quickly the company can grow toward profitability, and what the path forward looks like.
Things to Consider
Despite improved revenue and gross margins, Reddit remained unprofitable in 2023, reporting a net loss of $90.8 million. That’s an improvement from 2022’s $158.6 million loss.
However, many investors in top tech stocks often prioritize growth over profitability, so RDDT stock may remain under pressure until some sort of timeline for profitability is cemented in investors’ minds.
With most of its revenue generated from digital advertising, Reddit plans to diversify, including potential data sales. Its vast data from subreddits could be valuable for AI development, leveraging its 1.2 million daily posts and 7.5 million comments.
The Bottom Line on RDDT Stock
I think Reddit certainly does have some intriguing potential upside, but I’m among the investor group that simply wants to see more. There’s significant risk in buying this stock heading into its pivotal first earnings print. That’s being reflected in RDDT stock as we speak.
It’s my view that the company will need to show an earnest willingness to focus on profitability before certain investors step into this stock. So, with the market remaining on the fence, it’s going to be difficult to go against the grain with this one.
I’m going to be waiting to see what the company announces during its upcoming earnings report, and provide updates as they come. But for now, I’m on the fence.
On the date of publication, Chris MacDonald 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.