Why Reddit Stock Lost 19% in February

Shares of Reddit (NYSE: RDDT) were among the losers on the stock market last month after better-than-expected results weren't enough to keep the company's blistering momentum going.

The social media stock has been a huge winner on the market since its IPO a year ago, but investors now seem to believe its valuation has run up far enough, especially as concerns about the broader economy are swirling around growth stocks.

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According to data from S&P Global Market Intelligence, the stock finished February down 19%. As you can see from the chart, the stock started falling on its earnings report in the middle of the month and continued to slide from there.

RDDT data by YCharts

Is Reddit's bull run over?

Reddit actually gained over the first week of February, perhaps buoyed by news of expanding artificial intelligence (AI) capital expenditures by big tech companies, which could support demand for its data licensing program used to train AI models.

However, those gains quickly evaporated following the company's fourth-quarter earnings report, as the stock fell 5% and continued to decline from there. Despite the sell-off, the results were strong. Daily active unique users (DAUq) rose 39% to 101.7 million, but that was below estimates and represented a slowdown from the previous quarter. The company said a change in an Alphabet Google algorithm slowed user growth.

Revenue, meanwhile, jumped 71% to $427.7 million, which beat the consensus at $405.5 million. That growth was primarily driven by ad revenue, which grew 60% to $394.5 million.

Profits also soared, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) going from $23.2 million to $154.3 million, and it reported earnings per share of $0.36, which topped estimates at $0.25.

For the first quarter, its guidance called for revenue of $360 million-$370 million, representing 50% growth from a year ago, which is still strong but a notable decline from the fourth quarter.

Over the rest of the month, the stock continued to decline even as several Wall Street analysts urged investors to buy the dip. Macro pressure in the form of tariffs and weakening consumer sentiment also seemed to weigh on the stock later in the month.

Image source: Getty Images.

What's next for Reddit?

It's hard to fault Reddit's latest round of results, though the sell-off indicates that the stock may have run up too far, too fast in the eyes of investors. The stock trades at a forward price-to-earnings ratio above 100, and there are questions about how fast its advertising business can continue to grow.

At this point, the stock's rapid growth now seems priced in. Barring a surprise, we're unlikely to see the 2024 surge in the stock continue this year.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.