Reddit (RDDT) shares have soared 134% over the past six months, far exceeding the overall Zacks Computer & Technology sector’s modest gain of 0.4% and the Zacks Internet – Software industry’s climb of 12.9%.
In contrast, Meta Platforms (META), which is also venturing into advertising to bolster its position in content and communication services, achieved a total return of only 21.4% during the same period.
This robust performance is largely due to RDDT’s significant user growth, enhanced advertising success across various channels, and strategic investments in AI technologies aimed at improving global reach and ad capabilities.
Impressive RDDT Performance Compared to Sector and Industry
Image Source: Zacks Investment Research
AI Collaborations Enhance Reddit’s Advertising Strategies
Reddit’s growing number of partnerships further enhances its competitive edge. A notable alliance with Alphabet (GOOGL) has improved content discovery and community interaction by leveraging Reddit’s Data API, which enriches Google’s offerings while facilitating AI advancements beneficial to both companies.
In December 2024, Reddit introduced the testing of “Reddit Answers,” an AI-driven chatbot. This tool utilizes models from Reddit, Google, and OpenAI to provide U.S. users with summarized content, links to discussions, and community suggestions. Initially accessible on the web and iOS, it is set for a global launch with additional language support.
Moreover, Reddit’s association with Integral Ad Science (IAS) fortifies its advertising strategy. IAS’s AI-driven Total Media Quality suite boosts advertiser trust with reliable transparency and advanced measurement tools, ensuring brand safety while optimizing engagement across Reddit’s vast communities.
Ad Revenue and User Engagement Drive Reddit’s Growth
The company’s commitment to diversifying its advertising solutions is proving to be a crucial growth driver. In Q3 2024, Reddit’s advertising revenues reached $315.1 million, representing a 56% annual increase. This surge is fueled by more ad impressions, more efficient placements, and a rise in conversation placement ads.
As a result, engagement metrics have significantly improved, with conversation pageviews increasing by 40% year over year in the third quarter. Enhanced ad offerings, including conversation ads and tools like auto bidding and CAPI (Conversions API), contributed to higher conversion rates. Sectors such as automotive, consumer goods, and pharmaceuticals reportedly boosted performance as well.
In addition to its advertising achievements, Reddit’s user base has also expanded greatly. Daily Active Users (DAUs) saw a significant 47% year-over-year increase, surpassing 97 million, and reaching the noteworthy milestone of over 100 million DAUs for the first time in Q3.
Positive Earnings Projections for RDDT
Looking ahead, the Zacks Consensus Estimate for Reddit’s revenues in 2025 stands at $1.71 billion, suggesting a year-over-year growth of 33.87%.
The expected earnings for 2025 have also seen a slight increase, now estimated at 68 cents per share, reflecting a remarkable year-over-year growth of 119.51%.
Price and Earnings Consensus for Reddit Inc.
Reddit Inc. price-consensus-chart | Reddit Inc. Quote
What Investors Need to Know About RDDT Stock
It’s essential to note that RDDT stock may not currently be a bargain, as its Value Score of F indicates a potentially inflated valuation.
The trailing 12-month Price/Book ratio for RDDT is 14.63, significantly above its median of 6.66 and the Zacks Computer & Technology sector average of 10.43.
Price/Book Ratio Analysis
Image Source: Zacks Investment Research
Reddit is pursuing growth by enhancing its advertising initiatives, expanding internationally, and improving user experience through new search and discovery features. This strategy justifies its premium valuation.
Currently, the stock is rated with a Zacks Rank #2 (Buy) and holds a Growth Score of A, indicating a potentially strong investment opportunity according to Zacks’ proprietary assessment. For those curious, you can find the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
