⭐️ Will This IPO Deliver Gold for Investors?

What’s on the Menu 🍴

Exciting times ahead with IPOs and rate cuts on the horizon!

Will these offer opportunities or problems for investors?

Also, we’ve got some ETF investing mistakes to avoid.

Let’s do it:

  • The Reddit IPO: Will It Deliver Gold for Investors? ⭐️

  • Rate Cuts: Could This Time Be Different? ✂️

  •  ETF Position Overlap: Avoid This Diversification Mistake 📉

  • Turning Ideas Into Millions: An Interview with Noah Kagan 📺

Today’s newsletter is a 5 minute read.

The Reddit IPO:
Will It Deliver Gold for Investors? ⭐️

Popular social media company Reddit officially went public on Thursday, raising almost $800 million at a fully diluted valuation of roughly $6 billion.

The stock (ticker: RDDT) had a successful debut, rising from the $34 per share offer price and closing near the $50 level:

At Thursday’s close price, Reddit’s current market cap sits at roughly $9 Billion.

Many investors & Redditors are wondering whether it makes sense to buy the stock or sit this one out.

What the data tells us:

Despite already ranking among the top 10 most visited websites in the world, Reddit had impressive growth in active users last year:

The company also posted healthy +21% annual revenue growth in 2023, but remains significantly unprofitable:

At current prices that puts RDDT’s forward price-to-revenue multiple at over 9X, which is higher than all other publicly traded social media stocks including Meta, Pinterest, and Snapchat.

So two major concerns right off the bat are 1) unprofitability and 2) valuation.

However, RDDT management is targeting growth in excess of 20% in 2024, as well as breakeven on adjusted EBITDA (a proxy metric for pre-tax profit).

RDDT is expecting to make quick progress on profitability in the near term, and has over $1.5 billion of cash equivalents on the balance sheet with no debt.

That alleviates financial health concerns, but leaves investors wondering where profit margins will be in the long run.

RDDT wants to ramp advertising revenue as well as the revenue from companies like Google that are using the site’s data for training AI models.

While that makes sense, Reddit users are notorious for pushing back on any attempt by the company to increase monetization.

Growing revenue while appeasing users will be a major ongoing challenge for RDDT.

Some IPO History

When considering RDDT as an investment, an investor should decide if their holding period is short term or long term.

In the short term, the % of RDDT’s outstanding shares that are tradable on the open market (the “float”) is thin at roughly 20% of total.

That will change in July when the lockup period expires and more holders are allowed to sell, but for now that thin float can lead to squeezes higher.

Reddit users are a unique hivemind community, and sub-communities (”subreddits”) such as r/wallstreetbets could collectively try to push the stock higher.

Large datasets such as those published by Dr. Jay Ritter, show that many tech IPOs over the past several decades have done well initially but underperformed the market in subsequent years:

We compile our own data on popular IPOs, and many of them have posted lackluster returns in the years after going public:

Popular IPO returns since 2015

Here at the Daily Dough, we’ve found good success buying “busted IPOs”.

We’ll often wait a year or more after an IPO to purchase stock in a growth company, because many of them go through significant corrections.

Short term or long term, there’s money to be made on RDDT stock, but volatility is certain and timing is key!

Rate Cuts: Could This Time Be Different? ✂️

Just when we thought we may see the S&P 500 take a well needed breather, it rallied on the hopes that the Fed will still cut interest rates this year.

Market participants seem to agree (for the most part) that rates are expected to lower in 2024 from the 5.25%-5.50% range.

This was welcomed news to the market as the Fed has battled mixed news. GDP has been healthy, and the unemployment rate has remained low. This has cast a dark cloud over the Fed as they worry about stickier inflation.

Counter to the positive data, the consumer does seem to be slowing down when looking at overall year over year retail sales trends. Higher rates have also done the housing market no favors.

This is an odd scenario, because the economy typically falls into recession while the Federal Reserve lowers rates. So, you’d think we’d be anticipating for things to spiral downward.

Lowering rates has been the clear sign of keeping the economy in survival mode.

But this time may be different, and the market may just know this.

Lower interest rates will lead to a lot of relief for consumers.

Those with variable debt from credit cards or HELOC loans could see lower rates increase their disposable income. Not only that, lower rates almost guarantee to trigger the housing market to start seeing more transactions happening.

Homeownership affordability has been at all time lows due to interest rates and high housing prices. More inventory could help lower these prices and lower rates could make payments more feasible.

Let us not forget business investments that have been on pause because of higher rates.

Lastly, commercial real estate is on the verge of crisis. The Fed knows the trouble that lurks there.

So, lower interest rates may help a lot of people who were used to a zero interest rate environment for so long.

Could we be looking at a rate cut cycle that DOESN’T mean we will be in a recession?

It’s certainly possible.

The past 4 years haven’t gone as anyone has expected, so it’d be no surprise if this time really is different when it comes to interest rate cuts.

 ETF Position Overlap:
Avoid This Diversification Mistake 📉

As passive investing has risen in popularity, many confident do-it-yourself investors have been buying up ETFs.

These are some of the easiest ways to riches, but, if a diversified, global portfolio is your goal, you need to avoid the position overlap mistake.

A very popular finance influencer posted this video on the 3 ETFs she’s buying:

Of course, a lot of people follow her advice. So, let’s break it down.

To start, these 3 ETFs she suggests, VOO, QQQ, and VT, are amazing on their own.

VOO gets you access to the core S&P 500 (similar to SPY).

QQQ invests in just NASDAQ companies which tend to skew tech focused.

VT is similar to VOO, but it just adds in some international stocks as well. It’s invested in roughly 35% of international stocks, and 65% in U.S. stocks.

So… can you see where I am going here?

If someone were to only buy these 3 ETFs, there’s a big overlap of most of the top 10 stock positions. Said another way, all 3 ETFs hold the same top positions!

You can see the over-lapping positions (MSFT, AAPL, NVDA, AMZN, META, GOOG) in each ETF.

Now, for the average investor, a portfolio of these 3 ETFs will still perform well, since U.S. tech stocks have been the best performing for quite some time now. They’ll probably be pretty happy (and more concentrated).

However, if you’re looking to optimize a passive portfolio for diversification, this portfolio poses issues.

What could be a better solution? If someone is looking to add international exposure, they may choose to buy an ETF that offers “ex-US” exposure. Basically, it’s 100% invested in international stocks.

For tech exposure, there are plenty of options that could diversify you out of large tech (which you’ll get exposure to with your S&P 500 or even Nasdaq ETF), and move into some tech companies with higher growth potential.

Then there is diversification across sizes of companies that is lacking. VOO and QQQ focus on giant/large cap companies. VT only holds 25% of its allocation towards mid and small cap stocks (across both U.S. and international).

So if you’re truly trying to diversify across geographical regions AND sizes of companies, this 3 ETF portfolio of VOO, QQQ and VT isn’t going to accomplish that best.

Video Of The Day:
Turning Ideas Into Millions:
An Interview with Noah Kagan 📺

This week we sat down with Noah Kagan, co-founder of AppSumo, currently doing about $100M a year in revenue...

And author of Million Dollar Weekend: The Surprisingly Simple Way to Launch a 7-Figure Business in 48 Hours.

We talk about a ton of life lessons around investing, building businesses, and living our best lives!

Food For Thought 🧠

"The biggest risk is not taking any risk... In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
- Mark Zuckerberg

How did you like today's newsletter?

Let us know how we can deliver value.

Login or Subscribe to participate in polls.

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.