Reddit Shares Tumble as User Growth Disappoints. Is Now a Golden Opportunity to Buy the Stock?

While shares of Reddit (NYSE: RDDT) tumbled following its Q4 earnings report, the social media company's stock is still up a solid 20% year to date, as investors have embraced the stock after its March 2024 IPO. After debuting at $34, the stock is up more than five times in less than a year.

Reddit describes itself as "a global, digital city where anyone in the world can join a community to learn from one another, engage in authentic conversations, explore passions, research new hobbies, exchange goods and services, create new communities and experiences, share a few laughs, and find belonging." I'd describe it more as a message board platform on various topics where users are allowed to stay anonymous.

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Let's take a look at the company's recent earnings report and guidance to see if this is an opportunity to buy the stock.

Soaring revenue

Reddit has been growing its revenue quickly, and that continued in Q4, with revenue soaring 71% year over year to $427.7 million. Ad revenue climbed 60% to $394.5 million, with other revenue of $33.2 million. It credited its ad revenue growth to increased impressions, with prices staying steady. International helped lead the way with ad revenue growth of 76%.

The company has been doing a good job of adding new users to its platform. It said daily users increased 39% to 102 million, while weekly users grew by 42% to 379 million. However, the daily user number fell short of analyst expectations for 103 million users, as compiled by FactSet.

It saw nice increases in both logged-in and logged-out users. Average revenue per user (ARPU), meanwhile, climbed 23% to $4.21.

Reddit has been investing in both adtech technology and artificial intelligence (AI) to help improve its advertising campaigns. It said its conversation ads and newly launched Ask Me Anything (AMA) ads can leverage its community features to drive ad performance, while its new feature Trends tracks keywords and phrases so advertisers can better engage with their target audience. Meanwhile, it is using AI and automation to help advertisers run more efficient campaigns and improve ad targeting and delivery.

The company has also developed a new AI product for users called Reddit Answers that can help users get answers to a variety of questions, such as when is the best time to visit a location for vacation or how to cook a certain meal. It said users are asking the new AI solution everything from parenting advice to product recommendations. Reddit management said improving its search tools through AI and using machine learning to translate its content into other languages is a priority.

The company said France is the first country where it has used machine learning translation. It noted the country is growing between 30% to 40% faster than its focus markets. It said it is rolling out its translation machine learning to half a dozen other languages right now and will continue this throughout the year.

Reddit noted that a Google (part of Alphabet) search algorithm change hurt traffic in late Q4. However, it said traffic from search has recovered thus far in Q1, and it did see more people start to search for the term "reddit" after the change, indicating people were looking for its content.

Looking at profitability, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared from $23 million a year ago to $154 million. Earnings per share (EPS), meanwhile, came in at $0.36. The company noted that it would have been EPS profitable for the year if not due to a one-time charge related to stock-based compensation in Q1.

Moving forward, the company forecast Q1 revenue to be between $360 million to $370 million, representing 48% to 52% growth. It projected adjusted EBITDA in a range of $80 million to $90 million, representing 700% to 800% growth.

Image source: Getty Images.

Should investors buy the dip?

Reddit is doing a nice job growing revenue, users, and ARPU. It has introduced a number of nice adtech and AI solutions to help better monetize its user base. The slight miss in daily active users looks largely due to the Google algorithm change that was a disruption late in the quarter. However, that disruption now appears to be behind it.

Meanwhile, the company noted that its user base is about 50% international, while peers tend to be 80% or more. This is a big opportunity, and its translation machine learning should help drive more international users over time.

Looking at valuation, the stock trades at a forward price-to-earnings ratio (P/E) of 66 times 2025 analyst estimates and an enterprise value (EV)-to-EBITDA multiple of 58 times. With analysts expecting high-20% revenue growth the next few years and profitability metrics growing faster, that seems like a reasonable valuation.

RDDT PE Ratio (Forward) data by YCharts

Overall, if Reddit can continue its strong user growth and capitalize on its international opportunity, the stock should have some solid upside from here. As such, it is an option for investors to consider after the dip in price.

Should you invest $1,000 in Reddit right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and FactSet Research Systems. The Motley Fool has a disclosure policy.