Reddit’s Stock Surge and Subsequent Decline: A Buying Opportunity?

Reddit (NYSE: RDDT) debuted in the public market just over a year ago, witnessing a remarkable surge of 562% from its IPO price of $34 to a record closing high of $225.23 this February. The social media platform impressed investors with its rapid growth and increasing profitability.

However, within two months, Reddit’s stock price was halved, primarily due to the unpredictable tariffs and trade wars under the Trump administration, which led to a sell-off in high-growth stocks. This decline raises the question: could it represent a buying opportunity for patient investors?

Assessing Reddit’s Growth Trajectory

Reddit serves as a unique combination of a news aggregation platform, discussion forums, and social media, enabling it to carve out a niche in a competitive market. This hybrid model challenges conventional news sites and search engines.

The company tracks its growth through daily active unique users (DAUq), a metric that includes both logged-in users and those browsing without an account. Most of Reddit’s revenue is generated through advertisements, where logged-in users are more valuable because they tend to spend more time engaging with the content. This engagement drives its average revenue per user (ARPU). Furthermore, Reddit offers an ad-free experience and other features through its Reddit Premium subscription.

Over the past year, Reddit has achieved impressive growth in its DAUq users at high double-digit rates, forking to an increased ratio of logged-in users, thereby accelerating both ARPU and total revenues.

Metric	Q1 2024	Q2 2024	Q3 2024	Q4 2024
Total DAUq	82.7 million	91.2 million	97.2 million	101.7 million
Total DAUq Growth (YOY)	48%	51%	47%	39%
Percentage of Logged-In DAUq	37%	46%	45%	45%
ARPU Growth (YOY)	8%	2%	14%	23%
Revenue Growth (YOY)	48%	54%	68%	71%

Data source: Reddit. YOY = Year-over-year.

This growth was bolstered by numerous factors, including elections and geopolitical events, which spurred user engagement. Increased user discussions provided more data for Reddit’s targeted advertising. Additionally, the company entered into data-sharing agreements with Alphabet‘s Google and OpenAI, integrating Reddit discussions into Google’s search results and OpenAI’s AI chatbot.

As Reddit attracted more users and increased ad sales, its economies of scale enhanced profitability, reflected in its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and net profit margins. Consequently, Reddit achieved profitability on a generally accepted accounting principles (GAAP) basis in the second half of 2024.

Metric	Q1 2024	Q2 2024	Q3 2024	Q4 2024
Gross Margin	88.6%	89.5%	90.1%	92.6%
Adjusted EBITDA Margin	4.1%	14%	27%	36.1%
Net Income Margin	(236.7%)	(3.6%)	8.6%	16.6%

Data source: Reddit.

For the first quarter of 2025, Reddit anticipates revenue growth of 48% to 52% year over year, projecting an adjusted EBITDA margin of 23.3%. For the entire year, analysts expect revenue to increase 36% to $1.77 billion, with adjusted EBITDA projected to surge 90% to $567 million. Analysts also anticipate that the company will become profitable for the year, with a GAAP net profit of $215 million.

Is Now the Right Time to Buy Reddit’s Stock?

With an enterprise value of $19.3 billion, Reddit currently trades at 11 times this year’s sales and 34 times its adjusted EBITDA. While this valuation is not inexpensive, it may be justified given the company’s long-term growth prospects.

Reddit still has significant growth potential as its unique mix of social networking, news aggregation, and discussion forums continues to attract users and enhance data collection for targeted ads. However, the company remains vulnerable to economic factors such as tariffs and trade disputes, which may affect advertiser spending. This could also hinder subscriptions to Reddit Premium, which currently serves about half a million subscribers during economic downturns.

After the notable price surge in February, Reddit’s stock appears reasonably valued following its recent decline. Though it may experience volatility in the coming quarters, it could represent an attractive growth opportunity for long-term investors.