Reddit Inc. (RDDT) gets the prize for the 2nd best cream-of-the-crop Inflection Point of this earnings season. More on Reddit in a second.
Quick Sidebar: The trophy for MOST POWERFUL INFLECTION goes to... GeneDx Holdings Corp. (WGS)! WGS, our long-term pick from $13, gets the prize due to its massive beat and raise on all fronts. GeneDx’s Q3 report, this morning, revealed that its disruptive technology is truly on the fast-track to becoming standard of care for testing rare diseases. Powered by the inherent powerful leverage in its model, WGS has $3+ of EPS earnings power in 2026, which should translate into the stock heading to $110 over the next few quarters. Longer-term, it has strong potential to become a $1B in revenues company, earning $15 a share. Yes, you heard that right. If an uber-bull scenario manifests for GeneDX, the stock could have a $300 handle on it the next 3-4 years, making it one of our best picks ever.
As for Reddit, well it too posted a massive beat-and-raise, a quadruple-powered inflection.
First off, the beat was not just on the top line, where its revenue growth-rate accelerated for its third straight quarter, approaching nearly 70% YoY growth. It was also on the bottom line too.
Even more importantly, its guidance for Q4 ACCELERATED to a 12.3% guide up vs consensus as opposed to last quarter when Reddit guided up by 8%. This is the most important part of the inflection, as it means Reddit will be exiting the year at a nearly 80% growth rate.
This sets the company up for a series of continuous beats the next few quarters as the sleepy Sell Side analysts mirror the company's forward guide for Q4. To wit:
For the fourth quarter, Reddit expects to bring in revenue between $385-$400M ($392.5M midpoint) and adjusted EBITDA in the $110-$125M range ($117.5M midpoint), way ahead of the Bloomberg consensus estimate for revenue of $356.2M and adj. EBITDA of $87M.
Reddit is a very easy business to model, with Q4 typically up very strongly, relative to Q3. Reddit's CEO and CFO are not fools. They left plenty of room to beat Q4 handsomely once again, most likely above the rate of its Q3 beat. Management knows what drives big growth stocks.
So, what’s driving this surge in Reddit’s revenues? Well, a number of factors, including:
"People are going to Google with the intention of ending up on Reddit… And I think what's happening is people know that Reddit has answers, advice, perspectives on just about whatever you're looking for."
“Reddit continues to be one of the most visited and trusted sites in the world with opportunities available to us that aren’t available to most companies.”
“People are drawn to Reddit because the site consists of ‘communities in conversation’ for literally anything you're going through."
"If you have questions, there's just a high likelihood that Reddit, where people have been talking about everything for almost two decades, has an answer.”
The numbers don't lie. Powerful, sequential, revenue run-rate acceleration to higher highs is what always powers the BEST TOP TIER INFLECTIONS historically. Reddit should be no different:
Finally, the technicals could NOT be more favorable for RDDT as of this evening. Of note, the stock traded nearly 6M shares in the After Hours tonight – more in the post-market than its average daily volume of 4.3M shares. As such, RDDT is poised for a powerful 20-30% move to all-time highs tomorrow, making it truly one of the TOP TIER INFLECTIONS of 2024.
When looking at the share structure, currently Reddit's float is SUPER TIGHT at 57.9M shares. Remember that for the next few weeks. While we do expect a secondary at some point, for us, that is just short-term noise. The stock will be scooped up quickly in the coming days and will soon thereafter be an afterthought:
So, who may sell in a secondary? Well, Altman owns ~12M shares. But he surely sees big long-term upside, so why would he be in a rush to sell? Certainly possible though that he trims:
Altman controls roughly 12.2 million shares of Reddit, a company he first invested in over a decade ago. Reddit shares soared about 20% in extended trading after the company reported better-than-expected quarterly results and issued an optimistic forecast.
Instead, we think Advance Publications, which owns ~48M shares, will divest 10-15M shares in the coming days. We are saving some fire power for any such deal to REALLY back up the truck on this trade.
In case anyone was curious, Advance Publications, Inc. is the parent company of Condé Nast. Advance also has an ownership stake in Reddit. Condé Nast acquired Reddit in October 2006, then in 2011, Reddit became an independent subsidiary of Advance Publications.
Here are other large shareholders:
We think you get the point. Expect a secondary. But don't fear one.
RDDT should easily trade 20M-30M shares on Wednesday. Based on the massive beat and raise, along with the incredible surge in volume post-market, we expect demand to swamp supply.
As such, we see the RDDT staging a quick move to $110-$120 in the coming days.
Also, given that there is no guarantee ANY deal comes, we plunged in the after-hours and established a full position. We think buying into the stock Wednesday morning on its first flush makes sense. Reddit has had a big move into the print remember, rallying from $60. A lot of big guys knew a huge beat was coming.
To be honest, our Inner Voice surmised this too, which is why we alerted our High Touch members last week to this potential trade idea. Sometimes it’s better to be lucky than good!
As for our longer-term projections, we see Reddit’s forward numbers as being ridiculously low. Take a look at what the consensus estimates looked like before this Top Tier Inflection took place tonight:
Here are OUR projections for Reddit:
With Reddit’s incredible growth rate and earnings power, we think the P/E multiple will expand to 50x or more. Apply a 10x Price-to-Sales on 2026 revenues and we get to $162, roughly the same math we employ on a 50x forward P/E multiple.
Naturally, as investors eventually re-rate Reddit as more of an AI play over time, we think the company will secure much larger licensing deals with OpenAI and others in the coming quarters for the years ahead. There is certainly the chance RDDT goes parabolic and overshoots north of $200 next year too.
Reddit has all the trappings of the Top Tier Inflections we eagerly look for in each earnings season.
Because the stock has had a substantial move into the print and the odds are high for a secondary offering – perhaps even bigger than we are anticipating – there is a chance RDDT may not work as quickly as we believe.
Stop Loss: We plan to utilize a rare Time Stop on Reddit until its Q4 numbers get released in early 2025.
Election Note: Based on the big breakout in Bitcoin, the stock market appears to be handicapping a Trump victory. Reddit is the perfect stock for a Trump Administration as there should not be any tariffs levied on the company, rendering it immune from a lot of macro noise. This is yet another reason we are taking a longer-term slant here.
Of course, being the sharpshooting short-term traders we are, our plan is to take risk off as RDDT moves to $110-$120 in the coming days/weeks as our thesis plays out.
There is interest rate risk. Should Trump win AND the Republicans sweep Congress, the biggest risk in owning Reddit is its pricey valuation. It is not cheap. It never will be. Therefore, if we see the 10-year quickly spiral through 5% and head to the mid-to-high 5s, should the world go “cra cra” suddenly, Reddit would certainly not work immediately in that backdrop.
But, given the strong likelihood of another massive beat forthcoming, along with a serious guide up for 2025 out of the gates in Q1, we will sit with a smaller-sized position for the longer-term should such a backdrop develop.
It's a risk we are comfortable with. Everyone must know their own risk tolerance.
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Disclosure: We are long RDDT stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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