Why I won't touch Reddit stock.

One of the most highly anticipated initial public offerings (IPOs) in 2024 is theReddit (NYSE: RDDT)The social media company is known for its subreddits, which are landing pages where people are interested in researching a particular topic and seeking feedback and comments from users. It's a landing page for people interested in researching a topic, and it also seeks feedback and comments from users.

Generally speaking, shares in initial public offerings (IPOs) tend to be highly sought after. Given Reddit's popularity, the company's IPO is also getting a lot of attention. Let's explore whether this stock is a good buying opportunity and assess some of the risks involved.

Competitive and popular platforms

The social media space is highly competitive. But Reddit has 73 million daily active users, which proves that it can achieve a critical mass of users to stimulate engagement.

Facebook and InstagramMeta It has 3.2 billion daily active users across its various applications.Alphabet Google and YouTube are two of the most visited websites in the world with over 100 billion visits per month. Testimonials YelpThe average number of unique visitors per month on both tabletop and mobile platforms is approximately 74 million.

Reddit competes with all of these platforms to some extent. However, despite its reputation, the company is actually much less popular than other social media companies. As a result, the company's growth has been somewhat muted.

Last year's revenue grew by 21%, but the company is still hemorrhaging money, with a net loss of $91M in 2023. While this is an improvement over the previous year, Reddit's small size compared to its competitors makes me skeptical of its long-term potential.

Since advertising is the primary form of revenue, it's hard to see the company really starting to accelerate its growth on a path to sustained profitability.

Is Reddit an Opportunity for Artificial Intelligence?

Around the time of its IPO, Reddit began a new marketing campaign around artificial intelligence (AI). At first, I thought it was just a way to get on the AI bandwagon.

But after seeing that the platform's user engagement is weaker than that of its competitors, I'm even more convinced that the company is trying to change its business model. In other words, it's hard to attract more advertisers because Reddit's influence doesn't match that of some of its peers.

As a result, artificial intelligence could be some new avenue for growth. Specifically, Reddit is experimenting with data licensing. It's already signed a $203 million data license agreement, according to the Monitor. Essentially, this gives customers like Alphabet access to Reddit's database, which they can use to help train their own generative AI systems.

I admit, I'm intrigued by this strategy. But given its novelty, I think it's too early to recognize Reddit as a pure AI opportunity.

Note the potential of the memo

The last thing that worries me about Reddit's investment prospects is that it could become a meme stock. To be fair, technically speaking, any stock that begins to experience unusual trading volatility that seems out of touch with the fundamentals of the business could become a meme investment.

However, I see Reddit a little differently. A few years ago, the capital markets experienced an unprecedented shakeout, and the source of that shakeout wasGameStopThe stock. A day trader named Keith Gill - known on Reddit as Roaring Kitty - is the main man behind the GameStop saga.

Gil started posting his thoughts on GameStop stock on a subreddit called r/wallstreetbets. Normally, I would say this is an anomaly. But in Reddit's own S-1 filing, the company clearly states that r/wallstreetbets is a risk factor.

This doesn't necessarily mean anything, but I think prudent investors might want to think twice about rolling the dice on Reddit's stock, which I think typifies casino-style investing in the capital markets.

While Reddit may be a good opportunity in the long run, I think investors should look at the enforcement of data license agreements and evaluate whether the company is contributing to the development of AI in its own unique way. For now, I think there are more proven and mature companies in the social media space, and I would look for value in those.

Should you invest $1,000 in Reddit right now?

Consider this before buying shares of Reddit:

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Randi Zuckerberg, former Facebook Market Development Armsmaster and Spokeswoman and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's Board of Directors, and Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board. （Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's Board of Directors, and Adam Spatacco works at Alphabet and Meta Platforms.The Motley Fool owns shares of stock in both Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.

Why I won't touch Reddit stock.