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Social media platform Reddit (RDDT) operates in a competitive market, where companies are accelerating the adoption of artificial intelligence (AI) tools for producing ads and targeting users. To stay ahead of the curve, Reddit introduced two new AI-powered advertising features.
The new tool, named “Reddit Insights powered by Community Intelligence,” will provide real-time insights to marketers to identify trends and test new ideas. It will also provide a feature called “Conversation Summary Add-ons” that would add positive user comments under the ads for better marketing.
At this juncture, should investors consider investing in Reddit?
About Reddit Stock
Founded in 2005 and headquartered in San Francisco, California, Reddit (RDDT) is a popular social media platform. It offers a digital community space for its users where they can share ideas and opinions on their interests. The company is currently valued at $23.3 billion.
Reddit’s stock went public in a much-anticipated IPO last year. Over the past 52 weeks, Reddit’s stock has gained 121.8%. However, the stock is undergoing a correction, having declined 18% year-to-date, as it faces an uncertain economic backdrop. The stock had posted a 52-week high of $230.41 in February and is now 42% off this high.
Reddit’s stock has started surging again after the company announced that it would be joining the Russell 3000 Index later in June. Over the past month, Reddit’s stock has gained roughly 18.2%.
Reddit has a steep valuation, which suggests that the stock might be up for further short-term correction. Its price sits at a lofty 98 times forward earnings, which is considerably stretched compared to the sector median of 14x.
Reddit’s Q1 Results Were Better Than Expected
On May 1, Reddit reported robust fiscal 2025 first-quarter results. The company’s revenue jumped by 61% year-over-year to $392.4 million. This was $20 million ahead of Wall Street’s expectations. This was predicated upon the surge in Reddit’s user numbers. Its global Daily Active Unique (DAUq) count grew by 31% annually to 108.1 million. In the U.S., this growth was slightly slower, at 21%, reaching 50.1 million, while internationally, DAUq climbed 41% year-over-year to 58 million.
This growth division was also seen in the company’s revenue. Its U.S. revenue increased by 57% year-over-year to $313.9 million, while the company’s international revenue surged by 82% annually to $78.5 million. Reddit’s global Average Revenue Per User (ARPU) was $3.63, up 23% from the prior year’s period. Its international ARPU grew 22% to $1.34, while the U.S. ARPU climbed by 31% to $6.27.
The top-line surge was reflected in Reddit’s earnings. The company recorded net income of $26.2 million, representing a significant turnaround from the $575.1 million net loss it had reported in the year-ago period. Its Q1 EPS was $0.13, up significantly from the loss per share of $8.19 in the prior-year quarter. EPS also surpassed the $0.02 consensus analyst projection. Reddit’s adjusted EBITDA increased approximately 12-fold year-over-year to $115.3 million.
For the second quarter, Reddit expects its revenue to be in the range of $410 million to $430 million, which implies year-over-year growth of 46% to 53%. The company expects its adjusted EBITDA to be in the range of $110 million to $130 million, representing an annual growth range of 178%-229%.
Wall Street analysts are optimistic about the company’s future growth, projecting a solid earnings growth trajectory. EPS is projected to increase by 416.7% year-over-year in the second quarter to $0.19. For fiscal year 2025, they expect an EPS of $1.21, representing a 136.3% increase, followed by a 79.3% increase in fiscal 2026 to $2.17.
What Do Analysts Expect for Reddit Stock?
Analysts are reasonably positive on Reddit’s prospects. Expecting the company’s user growth to moderate a bit in the second quarter, mainly due to unfavorable comparisons, Loop Capital lowered the price target of Reddit from $210 to $200. However, Loop Capital still maintains an optimistic long-term view on Reddit, as the firm has not changed its “Buy” rating.
RBC Capital initiated its coverage on Reddit with a “Sector Perform” rating and gave the stock a price target of $125. Analysts from RBC Capital foresee a more consolidated landscape of internet user engagement due to the incorporation of Gen AI tools. Yet, Reddit is projected to keep benefiting from user engagement and ad revenue. Seaport Global analyst Aaron Kessler upgraded Reddit’s rating from “Neutral” to “Buy” in early May and gave a new price target of $165. This indicates a positive long-term view on the company’s prospects.
Overall, Wall Street analysts are bullish about Reddit’s future. They gave the stock a consensus rating of “Moderate Buy.” Of the 24 analysts rating the stock, 13 analysts gave it a “Strong Buy” rating, one gave a “Moderate Buy” rating, nine played it safe with a “Hold” rating, and one rated the stock a “Strong Sell.” The consensus price target of $149.04 indicates moderate upside potential of 12% from current levels. However, the Street-high price target of $220 reflects 65% upside potential.
Key Takeaways
Despite facing a competitive backdrop and macroeconomic pressure from the tariffs, Reddit is growing its user base robustly, and its financials are also climbing. The addition of the AI features is also painting a favorable picture for Reddit. Therefore, despite its high valuation, Reddit may be a solid long-term investment.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
