Is this recent IPO stock a buy now?

Initial public offerings (IPOs) can be great opportunities for investors. After all, getting in on a stock at the bottom — or close to it — can be a great way to generate big profits over time. However, not all stocks continue to be winners after their debut.

Take Reddit (RDDT 1.74%)for example. Its IPO this spring drew considerable excitement. But the stock has followed a volatile course since then, and it’s only natural to ask: Is it a buy now or not?

Image source: Getty Images.

What does reddit do?

Reddit operates an online messaging platform where users post questions and answers an endless variety of subjects. The company was festablished in 2005 and its shares have traded on the New York Stock Exchange since March 20.

It generates most of its income by selling of ads on its platform. In the second quarter, Reddit took in $281 million in total revenue, of which $253 million, or 90 percent, came from advertising.

Like many social media companies that rely on ad sales, the key to Reddit’s success lies in its ability to attract and retain eyeballs. On this front, the company reported 91 million daily active users (DAU) during T2. This figure is up 51% from the same period a year ago.

While 91 million DAUs is impressive, it’s still well below many of Reddit’s social media competitors. For example, Snap reported 432 million DAUs in its most recent quarter. Meanwhile, the king of social media stocks, Meta platformhe boasted 3.3 billion DAUs.

In other words, Reddit has a long way to go. However, user growth has been impressive and revenue is also on the rise at a constant rate.

Is Reddit now a buy?

First, let’s be clear: Because Reddit hasn’t generated profits during its time as a public company, its stock will be unsuitable for certain types of investors and portfolios. Mainly, value investors and income-oriented investors will want to be clear — at least for now.

Reddit is a growth stock. Although it generates little free cash flow, records no profits, and pays no dividends, growth-oriented investors may be intrigued by its potential, thanks to its sizeable and growing user base. And while the company doesn’t generate much in the way of free cash flow, it does generate some. In the second quarter, Reddit reported free cash flow of $22 million. This is important primarily because it is a positive number. In other words, Reddit isn’t tapping into its cash holdings to support its operations. In addition, the company has a large stock of cash. It reported $1.7 billion in cash and book equivalents at the end of last quarter, with just $28 million in debt.

For a young unprofitable company, both cash on hand and positive free cash flow are important because they give the company time to grow the business without having to borrow money to support operations.

In short, growth-oriented investors may want to consider Reddit, especially if the company can continue to demonstrate strong revenue and user growth in the coming quarters.