NYSE:RDDT Shares Plunge Post-Q4 Earnings: Is Reddit Stock a Buy on the Dip?
NYSE:RDDT Q4 Revenue Soars 71% to $428 Million, Yet Stock Drops 15%—Time to Buy or Sell?
Reddit (NYSE:RDDT) delivered a dramatic earnings season surprise, reporting stellar Q4 revenue growth of 71%, soaring to $428 million and decisively beating Wall Street’s consensus forecast by more than $22 million. Despite these impressive headline numbers, investors swiftly punished NYSE:RDDT stock, sending shares spiraling down roughly 15% immediately following the release. This sharp drop took Reddit stock down from recent highs above $230 per share to settle around $188, a steep decline for a company whose shares surged spectacularly from just $34 at its IPO last year. With the stock now substantially off recent highs, investors are grappling with whether this is merely an overreaction or a critical warning sign to stay clear.
Behind the Drop in NYSE:RDDT—What Spooked Investors Despite Reddit’s Profitability Surge?
Diving deeper into Reddit's financials, the core metrics appear robust on the surface. Gross margins expanded notably to 92.6%, up over 420 basis points from a year ago, and operating income rose dramatically to nearly $53 million, sharply higher from just $3 million the previous year. Reddit has now posted two consecutive quarters of GAAP profitability, and earnings per share reached $0.36 in Q4, comfortably beating analyst projections by $0.11 per share. The company also reported free cash flow of nearly $90 million—a radical turnaround from burning through $22 million in the same period the prior year. The balance sheet also remains rock-solid, featuring approximately $1.84 billion in cash and investments against total liabilities of only $200 million.
Yet, despite these overwhelmingly positive financial improvements, investors found fault in user growth figures, a vital metric for a social media-driven platform like Reddit. Daily active users (DAUs) grew roughly 40% year-over-year, reaching 101.7 million—impressive, but still short of market expectations, which had targeted around 103 million DAUs. A sudden disruption from changes in Google's search algorithm temporarily hampered user traffic, a factor Reddit cited in its shareholder communication. While Reddit maintains these issues have since been resolved, investors remain wary, considering the platform’s heavy reliance on external traffic from search engines. Furthermore, expenses rose faster than anticipated, even though profits surged, adding an additional concern for investors who scrutinize Reddit’s valuation closely.
Reddit’s Valuation Dilemma: Is NYSE:RDDT Still Worth the Premium?
Prior to this earnings report, Reddit’s share price expansion had driven the valuation skyward, trading at more than 25 times projected 2025 sales at its peak—a significant premium over social media peers like Meta Platforms (META). Following the recent drop, shares now trade around 19 times forward sales estimates of roughly $1.77 billion. However, considering Reddit consistently exceeds revenue guidance, actual 2025 revenues might be closer to the $2 billion mark. Such a scenario could make today's valuation more palatable, particularly if Reddit continues delivering outsized growth.
Additionally, adjusted EBITDA forecasts for the current quarter remain strong, targeted between $80 million and $90 million—comfortably ahead of analysts’ average prediction of $72.3 million. Given Reddit’s substantial growth trajectory, this valuation premium could be justified, especially as profits and cash flow continue improving dramatically. Moreover, the potential inclusion of Reddit in the S&P 500 could serve as a significant catalyst down the line, attracting institutional investment and bolstering the stock price further.
Reddit’s International Expansion and Monetization: Major Growth Catalysts Ahead
Reddit’s future growth prospects remain robust, particularly with international expansion and diversifying revenue streams. International daily active users grew an impressive 46% year-over-year in Q4, powered by Reddit’s advancements in machine translation technologies. Revenue from newer advertising offerings—such as Reddit Pro and AMA ads—increased significantly, and Reddit’s data licensing segment saw explosive growth, jumping by an astounding 547% year-over-year.
Even amidst slower-than-expected user growth, Reddit’s average revenue per user (ARPU) still surged 23% year-over-year, indicating the platform’s increasing effectiveness in monetizing its existing audience. Reddit’s innovative advertising solutions continue resonating with advertisers seeking highly engaged, niche communities, positioning the platform as a high-value digital advertising alternative.
Potential Risks Remain: Reliance on External Traffic and Anonymous Community Model
Reddit, however, is not without considerable risks. Its heavy dependency on external platforms—especially Google search algorithms—leaves it vulnerable to unpredictable traffic volatility. The company's anonymous user base also complicates targeted advertising efforts, potentially limiting ad effectiveness compared to more data-rich platforms like Facebook or Instagram. Public perception challenges could also impact Reddit's attractiveness to mainstream advertisers, particularly as the company scales globally.
Setting Realistic Price Targets: Could NYSE:RDDT Reach $330 by 2028?
Some bullish analysts propose that Reddit could see its share price climb as high as $330 by 2028, based on a valuation model similar to Twitter’s takeover multiple of around 46 times peak EBITDA. Using Reddit’s own projected EBITDA margin of roughly 40% on 2028 revenues (estimated around $3.6 billion), this calculation yields a potential valuation approaching $66 billion. Assuming an increased share count of approximately 200 million shares by that time, a theoretical target price near $330 emerges—almost doubling today's depressed level of $188.
Conversely, using a more conservative valuation ratio of 10x EV/Sales (closer to mature peers like Pinterest or Snap), Reddit's stock could still maintain a reasonable valuation around $180-$200, nearly in line with current pricing. This valuation approach underscores Reddit’s significant upside potential, particularly given robust revenue growth rates that far exceed industry norms.
Buy, Sell, or Hold NYSE:RDDT at $188?
Considering Reddit’s improving profitability metrics, substantial cash flow generation, and powerful international growth trajectory, the post-earnings sell-off might represent a prime buying opportunity for investors comfortable paying a premium for substantial future growth. The robust financial performance, along with insider confidence as shown in recent transactions (view insider trades), provides a solid foundation for considering a bullish stance.
Given Reddit’s exceptional revenue growth rate of 71%, dramatic margin improvements, and the likelihood of upward analyst revisions following robust guidance, the recent pullback in NYSE:RDDT shares appears unjustified and may soon prove temporary. While acknowledging the higher-risk profile due to Reddit’s dependency on external factors and the inherent volatility of high-growth stocks, I consider NYSE:RDDT a compelling buy at current price levels near $188. Investors aiming for long-term growth and capable of absorbing interim volatility could see substantial upside as Reddit continues executing its aggressive monetization and global expansion strategy.
