Reddit RDDT shares appear to be overpriced, indicated by a Value Score of F.
The forward 12-month Price/Sales ratio for RDDT stands at 18.19, significantly above its typical value of 14.76 and the broader Zacks Computer & Technology sector’s average of 6.64.
Forward Price/Sales Ratio Comparison
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In the last six months, RDDT shares have risen by 261.2%. This is significantly better than the Zacks Computer & Technology sector, which saw a return of 9.3%, and the Zacks Internet – Software industry, which increased by 33.9%.
Outstanding Performance Against Peers
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This remarkable increase can be credited to RDDT’s solid user growth, enhanced advertising performance across various platforms, and substantial investments in AI technology and machine translation, which have broadened its global reach and advertising capabilities.
Notably, RDDT has outperformed Meta Platforms META, which is also venturing into advertising to compete in the content and communication arena. In the same timeframe, META shares achieved a return of 39.1%.
Growth Fueled by Enhanced Advertising and User Engagement
The growth of Reddit’s advertising business has surged, seeing a 60% year-over-year increase to $395 million in the fourth quarter of 2024. This jump was driven by a higher number of ad impressions, more efficient placements, and the addition of conversation placement ads.
Improvements made to their advertising mechanisms, such as increasing ad relevance and leveraging the Conversion API, have also contributed to reduced costs and improved efficiency.
New offerings, like the AI-powered Headline Generator and Reddit Pro Trends, were introduced in the fourth quarter of 2024, enabling businesses to gain real-time insights and organically grow their presence on the platform. These initiatives have made Reddit more appealing to advertisers, helping the company attract and retain clients.
The platform’s daily active users soared to 101.7 million, marking a 39% increase compared to the same time last year. This rise was especially prominent in international markets, with user growth of 46%. Additionally, logged-in users grew by 27%, continuing a consistent upward trend over the past two years.
This heightened user engagement is beneficial for Reddit’s advertising revenue, as a more engaged user base translates to more opportunities for advertisers to connect with their audiences.
Leveraging AI to Enhance Experience and Advertising
Reddit’s increasing partner network enhances its competitive position. A partnership with Alphabet GOOGL provides better content discovery and community engagement by granting access to Reddit’s Data API, thus supporting AI advancements for both companies.
In December 2024, Reddit initiated testing for “Reddit Answers,” an AI-based chatbot using models from Reddit, Google, and OpenAI. This feature aims to offer curated summaries, relevant discussion links, and community suggestions for users in the United States, with plans for broader global access and language support.
Additionally, Reddit is tapping into new opportunities through content licensing partnerships. In the fourth quarter of 2024, a collaboration with Intercontinental Exchange ICE was announced to create new data and analytics products tailored for the financial sector.
This partnership intends to harness Reddit’s vast collection of over 16 billion posts and comments, combining it with ICE’s data science capabilities to improve portfolio management, algorithmic trading, diligence, and risk assessment.
While this initiative is set to deliver valuable insights to financial experts, Reddit’s Data API Terms remain unchanged, ensuring that non-commercial usage continues to be free under set conditions.
Earnings Estimates Present a Mixed Outlook
For the first quarter of 2025, RDDT estimates revenues between $360 million and $370 million. The Zacks Consensus Estimate for revenues is at $372.59 million, reflecting year-over-year growth of 53.35%.
The expected loss per share is set at 4 cents, a drop of 7 cents over the last month. This represents a year-over-year decline of 113.79%.
Price and Consensus Chart for Reddit Inc.
Reddit Inc. price-consensus-chart | Reddit Inc. Quote
Stay updated with the latest EPS estimates and surprises on Zacks Earnings Calendar.
Analyzing the Investment Potential for RDDT Stock
Reddit aims to boost growth by expanding its advertising reach, improving user experience, and enhancing features like search and discovery tools.
However, the fourth quarter of 2024 posed challenges due to an algorithm tweak by Google Search, which caused traffic fluctuations that particularly affected users who were not logged in.
Macroeconomic uncertainties and stiff competition from other social media networks are ongoing challenges that affect user interaction and advertising market share. Concerns regarding valuation persist as well.
Currently, Reddit holds a Zacks Rank of #3 (Hold), suggesting that investors may wish to wait for a better entry point before purchasing the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
