Reddit recently unveiled its impressive December quarter metrics, highlighting a daily active user average of 101.7 million. Unfortunately, this figure lagged behind analyst projections of 103 million, as noted by FactSet.
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In a press conference, CEO Steve Huffman attributed the slight dip to mid-quarter volatility from Google’s search algorithms. According to Huffman, although there was initial turbulence, traffic from Google search has already rebounded in the first quarter of this year, restoring momentum to Reddit’s user base.
Morgan Stanley Analyst’s Buying Signal
Brian Nowak, a Morgan Stanley analyst known for his positive outlook on Reddit, released a client note titled “Buy The Google Blip Dip.” Nowak suggests that investors should consider this minor miss an opportunity to buy back into Reddit, arguing that the change was not significant and the relationship with Google remains robust.
Market Reactions and Moving Average Support
On the stock market, Reddit’s shares faced a decline of approximately 7%, closing at around $201.14 on Thursday. Initially, the drop was more pronounced, reaching over 15% following the release of the quarterly report. However, the stock found support near its 21-day moving average, indicating a stabilizing trend.
High Expectations for Reddit Stock
Reddit saw remarkable gains, surging over 300% in the 11 months following its initial public offering (IPO). According to New Street Research analyst Dan Salmon, the recent drop represented Reddit stock correcting its exuberant rise rather than indicating a fundamental shift.
The only noteworthy issue was the user growth slowdown, dropping to 39% in Q4 from a robust 47% in Q3.
Reddit’s Earnings and Revenue Performance
Reddit reported earnings of 36 cents per share in the December quarter, exceeding analysts’ expectations of 25 cents per share. Sales saw a significant year-over-year jump, growing by 71% to reach $427.7 million. This acceleration is noteworthy, particularly since the third quarter saw 68% growth, and it surpasses the revenue estimates of $405 million.
Google Algorithm Changes: A User Intent Indicator
Google’s algorithm changes have long been a point of concern for Reddit. These changes can influence traffic significantly, as hinted by Huffman in earlier earnings calls. During the December quarter call, Huffman acknowledged the inherent volatility brought about by Google’s algorithm updates.
While Huffman did not disclose the specific alterations made by Google, he framed the situation optimistically, emphasizing Reddit’s ability to adapt. Huffman pointed out a positive trend: the increase in users searching specifically for ‘Reddit,’ suggesting a growing intent to visit the platform directly.
Upbeat Outlook for Q1
In its forecast for the current quarter, Reddit remains optimistic. The company anticipates revenues of $365 million, placing it above the $358 million projected by analysts. Reddit also projects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $85 million, compared to the analyst estimates of $73 million.
Diverse Revenue Streams Boosting Reddit’s Growth
Reddit’s recent rally was driven by impressive advertising revenue and strategic moves to increase income through data licensing deals with prominent AI developers like OpenAI and Google. This diverse revenue strategy ensures that Reddit is not overly reliant on any one source of income, enhancing its long-term stability.
Piper Sandler analysts viewed the Google-related dip as an anomaly, maintaining their bullish stance on Reddit stock. They praised Reddit’s user growth, the expansion of data licensing, new advertising products, and its industry-leading incremental margin.
Contrasting Analyst Opinions
Not all analysts share such a positive outlook. Mark Shmulik, of Bernstein Research, raised concerns about Reddit’s control over critical KPIs, particularly domestic engagement. Shmulik maintains an underperform rating on Reddit stock, questioning the platform’s ability to consistently navigate changes in search algorithms.
IBD Composite Rating and Key Lists
Reddit has a commendable IBD Composite Rating of 98 out of 99, denoting exceptional growth potential. This score amalgamates multiple proprietary ratings to provide a comprehensive assessment. Stock Checkup by IBD categorizes stocks with a Composite Rating of 90 or higher as among the best growth stocks.
Moreover, Reddit stock is a featured member of the prestigious IBD 50 list, which showcases top-performing growth stocks. It also appears on IBD’s IPO Leaders and Tech Leaders lists, reflecting its roles as a standout in both categories.
Analyst Takeaways
Despite the recent setback, the overall picture for Reddit remains promising. Strong user growth, coupled with strategic partnerships in the rapidly evolving AI sector, positions Reddit as a leadership contender in digital advertising.
While some analysts caution against over-excitement, predicting that Reddit may face challenges in maintaining consistent performance in the face of periodic changes from Google, most remain optimistic about its long-term trajectory. Reddit’s adaptability and its strategic approach to revenue diversification continue to be key strengths.
The Road Ahead
Reddit’s first quarter numbers, due in March, will play a pivotal role in determining whether current market skepticism is warranted. With the company’s proven track record of adaptation and a robust user base, many believe that Reddit can weather this temporary turbulence.
For investors, the decision to buy after this dip will likely depend on their views on Reddit’s control over user engagement and its ability to sustain revenue growth driven by advertising and data licensing.
Conclusion
While Reddit experienced a slight dip in its December quarter user base, surpassing earnings and revenue expectations provides a strong foundation for continued growth. The company’s strategic diversification and demonstrated adaptability offer a compelling case for long-term investment. Investors will closely monitor Reddit’s next earnings report to evaluate its resilience and ongoing performance.
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