Reddit set to report its first results as a public company. Analysts are eyeing its upside.

By James Rogers

Reddit reports first-quarter results after market close Tuesday

Reddit Inc. reports its first results since its initial public offering this week, with analysts eyeing revenue upside from the social-media platform.

After a dearth of tech IPOs, Reddit's (RDDT) offering earlier this year attracted plenty of attention, and was touted as a potential bellwether for other public offerings this year. The company's shares rose 48% in their first day of trading on March 21, but have since fallen 4.3%.

Reddit reports first-quarter results after market close Tuesday, with analysts surveyed by FactSet expecting the company to report a loss of $8.75 a share and sales of $214 million.

Related: Reddit poised for AI and user growth, analysts say, as they initiate coverage

But analysts see potential positives in Reddit's first-quarter numbers. Bank of America expects upside to its Reddit revenue estimate of $212 million, which represents a 29% year-over-year increase, and advertising revenue of $199 million, a 21% increase on the prior year's quarter. In a note released Monday, Bank of America analyst Justin Post said he expects Reddit's revenue upside to flow through to Ebitda. Reddit's costs, he added "are primarily tied to infrastructure & headcount." Analysts surveyed by FactSet expect Reddit to report negative Ebitda of $23.8 million.

"Tactically, we see room for a top-line beat vs. FactSet median of 1-2%," wrote Raymond James analyst Josh Beck, in a note released Monday. "U.S. DAUq [Daily Active Uniques] trends look encouraging," Beck added. Raymond James also sees potential for Reddit revenue outlook in the $215 million to $240 million range.

"Key areas for the call are 2Q revenue/user outlook, ad platform progress (new free-form ads), and commentary on data license deals (& possible enforcement for past AI usage of Reddit data)," said Bank of America's Post. "We think 2Q revenue & user outlook will be the most important driver of post-call stock performance."

Related: Reddit is bucking this big tech trend. Analysts view it as a positive.

Bank of America cited data from Sensor Tower that suggests Reddit's global mobile daily average users are "trending well," rising 3.9% quarter to date. "We are maintaining 1Q estimates but raising our forward estimates to reflect slightly higher user growth & monetization," said Post. Bank of America raised its second-quarter revenue estimate to $229 million from $222 million, and estimates 15% year-over-year advertising revenue growth in the second quarter. Analysts surveyed by FactSet are looking for second-quarter revenue of $227.5 million.

Bank of America has a neutral rating for Reddit and Raymond James has a strong buy rating. Of 15 analysts surveyed by FactSet, eight have a buy rating, six have a hold rating, and one has an underweight rating for Reddit.

Reddit's lack of profitability on an annual basis came under scrutiny in the run-up to the company's IPO. However, Reddit's CFO Drew Vollero told MarketWatch on the day of the IPO that the company swung to a profit between the first and second halves of 2023. The company's swing to a profit in the second half of last year was on an adjusted EBITDA basis.

Related: How the AI potential of Reddit's user data has helped send its stock soaring

The company's comments on capex, which run counter to the spending trend at tech giants such as Meta Platforms Inc. (META) and Alphabet Inc. (GOOGL) (GOOG), have also piqued the attention of analysts.

"We don't really have capex to speak of," Reddit CFO Vollero told MarketWatch. "We carry text, which is a lot cheaper to carry than video or images," he said.

The CFO also highlighted Reddit's "world-class" gross margins as a key strength, noting that they have been 80% or more for 12 quarters. Reddit's gross margin was 86% last year.

Opinion: Reddit IPO is telling stock investors what they should know about the market now

Reddit shares ended Monday's session up 3.5%, outpacing the S&P 500 index's SPX 1% gain.

-James Rogers

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05-06-24 1801ET

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