💼 Inside the Portfolio: Updates from our Swing Trading Desk

04 Nov 2024 - Insights, adjustments, and forecasts about our latest swing trades 💹

Election Day Looms: Market Caution Prevails Amid Volatility

As we approach election day, today's trading session is expected to be subdued, with many investors opting to stay on the sidelines unless a highly favorable opportunity presents itself. This week is packed with significant events that could sway market dynamics, making it crucial for investors to tread carefully. With all Market Monitor indicators flashing red, it's prudent to avoid unnecessary risks.

Position Updates:

• TUSK: Our decision to hold through earnings did not pay off as anticipated. Despite expectations for a rally, the stock fell below the critical $4.13 weekly level, resulting in a loss.

• APPS: We exited the second half of our position at breakeven.

• RDDT: After capitalizing on post-earnings strength by selling half, we were stopped out of the remaining shares this morning.

New Positions and Subscriber Insights:

In light of the current market volatility, we have added a defensive position that aligns with our risk management strategy for the week.

1. Reddit Inc. (RDDT)

Reddit, Inc. (NYSE: RDDT) is a leading social media platform that organizes digital communities based on specific interests. Founded in 2005 and headquartered in San Francisco, California, Reddit enables users to engage in conversations by sharing experiences, submitting links, uploading images and videos, and replying to one another. The company operates as a subsidiary of Advance Publications, Inc.

Technical Analysis and Investment Rationale

Business Model

Reddit generates revenue primarily through advertising, premium memberships (Reddit Premium), and other revenue streams such as awards and virtual goods. The advertising model includes display ads, promoted posts, and video ads, which are targeted based on user interests and behaviors. Reddit Premium offers users an ad-free experience and access to exclusive features and content.

Financial Performance:

1. Revenue Growth

   • Annual Revenue (2023): $804.03 million

   • Quarterly Revenue (Q3 2024): $348.35 million

   • Advertising Revenue (Q3 2024): $315.1 million (90.46% of total revenue)

   • Other Source Revenue (Q3 2024): $33.25 million (9.54% of total revenue)

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Key Financial Highlights from Q3 2024

1. Revenue Growth

   • Reddit's Q3 2024 revenue grew 68% year-over-year to $348.4 million.

   • Advertising revenue increased 56% year-over-year to $315.1 million, driven by strong growth across objectives, channels, verticals, and geographies.

2. Profitability

   • Reddit achieved GAAP profitability for the first time in Q3 2024, with a net income of $30 million.

   • The adjusted EBITDA margin was 27% in Q3 2024, nearly double the prior quarter's 14% margin.

3. User Engagement

   • Daily Active Uniques (DAUq) increased 47% year-over-year to 97.2 million.

4. Free Cash Flow

   • Reddit generated $70 million in free cash flow in Q3 2024, representing 20% of revenue.

5. Future Guidance

   • For Q4 2024, Reddit expects revenue in the range of $385-$400 million, representing 54-60% year-over-year growth, and adjusted EBITDA in the range of $110-$125 million.

Detailed Financial Metrics

1. Revenue

   • Quarterly Revenue for Q3 2024: $348.4 million, with $315.1 million from advertising and $33.2 million from other sources.

2. Earnings Per Share (EPS)

   • EPS for Q3 2024: $0.18, a significant improvement from previous quarters.

3. Net Income

   • Net income for Q3 2024: $29.85 million, compared to a net loss of $7.4 million in the prior year.

4. Free Cash Flow

   • Free cash flow for Q3 2024: $70.27 million, a substantial increase from previous periods.

Strategic Position and Market Potential

1. User Base and Engagement

   • Reddit's platform continues to attract a growing number of daily active users, which is a key driver for its advertising revenue growth. The 47% increase in DAUq to 97.2 million highlights the platform's increasing popularity and user engagement.

2. Revenue Diversification

   • While advertising remains the primary revenue source, the significant growth in other revenue streams (547% year-over-year increase) indicates successful diversification efforts.

3. Profitability and Cash Flow

   • Achieving GAAP profitability and generating strong free cash flow are critical milestones that demonstrate Reddit's operational efficiency and financial health. These metrics are essential for sustaining long-term growth and providing value to shareholders.

4. Future Growth Prospects

   • The optimistic revenue and adjusted EBITDA guidance for Q4 2024 reflect Reddit's confidence in its growth trajectory. The expected revenue growth of 54-60% year-over-year indicates strong market demand and effective monetization strategies.

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Technical Analysis:

For the first time, RDDT surprised Wall Street with a profit, driving its stock to break through its all-time high during after-hours trading. This unexpected profitability has set the stage for what analysts are calling "blue skies" ahead.

The stock's meteoric rise exemplifies a classic episodic pivot, where a single event significantly alters the market's perception of a company's value. Investors and traders are buzzing with excitement as RDDT's performance defies previous expectations, showcasing the company's newfound financial strength.

The trading day began with an initial attempt to enter the market at the opening bell. However, this first entry was stopped during the first pullback, a common occurrence in volatile trading environments. Undeterred, we closely monitored the 15-minute chart, waiting for a consolidation phase to make a second entry. This strategic move involved a calculated risk of $1.50, which ultimately paid off as the stock continued its upward trajectory.

Entry Day: 30 October

Price: $110.78