Is Reddit a Buy on the Dip?

Reddit (NYSE:RDDT) share price has been on the proverbial ropes so far this year, losing almost 35% of their value in the past 30 days alone.

This tumble comes in spite of top and bottom line growth, suggesting that a deal may be in the offing for bargain hunters. Is Reddit a buy on the dip, or will shares slide further as the stock market enters a more bearish period?

Why Has Reddit Fallen So Far?

Several factors have contributed to RDDT’s decline over the last months. Among these were the user numbers found in its Q4 results. While Reddit was able to grow its user base to 101.7 million daily active unique visitors, the number fell short of what analysts had expected.

According to Reddit’s management, the change largely reflected changes to how Google ranks search results. Reddit also had a significant earnings miss in the quarter, delivering $0.36 per share against the expected consensus of $0.70.

The timing of the weaker-than-expected earnings and user numbers, however, was particularly bad. While RDDT might have recovered quite a bit in a more bullish market by now, it has also gotten caught up in a general tech stock selloff that has dragged the broader market into a correction.

Reddit had previously been rising on both the platform’s ad revenue performance and the potential for the company to monetize its vast troves of data by licensing them for AI model training.

It’s also worth noting that RDDT shares may already have been primed for a fall due to their extremely high valuation. The company only went public about a year ago at an IPO price of $34. On the day of the IPO alone, shares skyrocketed by nearly 50%. The top of the 52-week range for RDDT was over $230, nearly seven times its initial price. As such, the market itself appears to have set Reddit up for a correction by bidding the price up far beyond a reasonable level.

This is especially true in light of the fact that Reddit has only recently achieved profitability after 20 years of consistent losses. Q3 of last year represented Reddit’s first profitable quarter, giving investors a very limited positive earnings history to work with.

Although revenue growth is more important to Reddit as a high-growth tech company, the amount of time it took the business to become profitable and the heights the stock reached while it was still losing money may call its pre-decline valuation into question.

Is Reddit Still Performing Well?

Although investors focused largely on the negatives of the Q4 earnings report, it’s worth noting that there were also some rather positive developments for the company late last year.

Total revenue for the full year of 2024 reached $1.3 billion, a 62% increase over 2023. The growth rate in Q4 was even stronger, as quarterly revenues advanced 71% to almost $428 million.

While net income was still negative for the full year, Reddit was able to achieve very strong earnings growth in the last quarter of the year. Net income for that period totaled $71 million, while gross margin was an extremely impressive 92.6%.

Even in the area of user growth, Reddit delivered some fairly impressive results. Q4 daily active unique user counts increased 39% compared to the year-ago quarter. Management has also said that the impact of Google on user counts abated in the Q1, suggesting that forward user growth could be more in line with what analysts had expected in Q4.

How Does the Valuation Look Today?

After dropping so much, Reddit’s valuation has been tamped down quite a bit. Even so, the stock still trades at 14.9 times sales and 10.9 times book value.

At current prices, Reddit will likely need to keep posting best-in-class revenue growth numbers and report consistent earnings growth to keep stock prices from potentially retreating even more.

Despite this, it’s worth noting that analysts still expect very positive short-term returns from RDDT. 

Is Reddit a Buy on the Dip?

The consensus price target for the stock is $202.11, a jump of over 57% from the most recent close of $128.21. Even leaving room for the decently strong possibility that this projection is too optimistic, RDDT shares may very well deliver very positive returns even if they significantly underperform analyst expectations.

While Reddit has only recently become profitable and still carries a decent amount of risk, the selloff that has taken place over the last month has likely been too extreme.

Reddit is still a very popular forum and community website that boasts a 46% usage rate among US adults from the ages of 18 to 29 and a 35% rate among these 30-49. This extreme popularity likely gives Reddit a wide moat that will support it as it continues to grow both its advertising and data revenues.

There’s already some evidence of RDDT shares rebounding, potentially signaling that the market is getting past the worst of the selloff. On March 11th, Reddit shares rebounded 10%, partially driven by a new analyst note that reiterated a bullish view of the stock’s prospects.

Of course, Reddit could still see plenty of volatility alongside other technology stocks. The broader economy is increasingly worrying investors, causing shares to sell off almost across the board. Reddit, however, could be a good long-term bet that has the potential to grow for many years to come. Although tariffs could negatively impact ad revenues at top digital platforms, Reddit will likely remain an extremely popular online community that could prove strong in a wide range of economic climates.

If Reddit can sustain high revenue growth and build earnings further, there’s a very good chance that the dip the stock is in right now could present an attractive buying opportunity. The company appears to be turning in basically solid performance and enjoys a competitive advantage that would be very difficult for another platform to replicate. As such, Reddit could be a decent buy now for investors with a fairly high risk tolerance seeking growth opportunities.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.