Reddit RDDT shares are currently overvalued, as suggested by its Value Score of F.
In terms of the forward 12-month Price/Sales ratio, RDDT is trading at 18.19, higher than its median of 14.76 and the broader Zacks Computer & Technology sector’s 6.64.
Price/Sales (F12M)
Image Source: Zacks Investment Research
RDDT shares have surged 261.2% in the trailing six-month period, outperforming the broader Zacks Computer & Technology sector’s return of 9.3% and the Zacks Internet - Software industry’s rise of 33.9%.
RDDT Shares Beats Sector, Industry
Image Source: Zacks Investment Research
The outperformance can be attributed to RDDT’s strong user growth, improved advertising performance across multiple channels, and strong investments in AI-driven tools and machine translation to enhance its global reach and ad solutions.
The company has outperformed its peer, Meta Platforms META, which is also expanding into advertising to compete in the content and communication services market. Shares of META have returned 39.1% over the same time frame.
RDDT Benefits From Surge in Ad Growth and User Engagement
Reddit’s continued focus on diversifying its advertising solutions and enhancing ad efficiency has also emerged as a critical growth driver for its business. The advertising business grew 60% year over year to $395 million in the fourth quarter of 2024, driven by higher impressions, more efficient ad placements and expanded conversation placement ads.
Reddit made progress in improving its advertising solutions, including higher relevance of ads, increasing ad conversions, and leveraging tools like the Conversion API, which helped reduce costs and improve ad performance.
In the fourth quarter of 2024, Reddit introduced new advertising products like the AI-powered Headline Generator and Reddit Pro Trends, which helped businesses uncover real-time insights and grow organically on the platform. These tools enhanced the value that Reddit provides to advertisers, attracting new customers and retaining existing ones.
Reddit’s user engagement was strong, with daily active users increasing to 101.7 million, marking a 39% year-over-year increase in the fourth quarter of 2024. This growth was particularly strong in international markets, which saw a 46% increase year over year. Additionally, logged-in users rose 27% year over year, continuing a steady upward trend for the last two years.
This surge in user engagement further supports growth of Reddit’s advertising business, as a larger, more engaged user base offers more opportunities for advertisers to reach its target audiences.
RDDT’s AI-Driven Partnerships Boost User Experience and Ads
Reddit’s expanding partner base also strengthens its competitive prowess. Reddit’s partnership with Alphabet GOOGL boosts content discovery and community engagement by providing access to Reddit’s Data API. This enhances Google’s products and supports AI advancements, benefiting both companies.
Building on this, in December 2024, Reddit announced the testing of “Reddit Answers,” an AI-powered chatbot leveraging models from Reddit, Google, and OpenAI to provide users in the United States with curated summaries, links to discussions, and community recommendations. These are initially available on the web and iOS, with plans for a broader global rollout and language support.
Reddit also ventured into new verticals through content licensing partnerships. In the fourth quarter of 2024, the company announced a collaboration with Intercontinental Exchange ICE to develop new data and analytics products for the financial industry.
This partnership will leverage Reddit’s vast repository of over 16 billion posts and comments, integrating them with ICE’s data science and machine learning infrastructure to enhance portfolio optimization, algorithmic trading, due diligence, and risk management.
While this initiative aims to provide financial professionals with valuable market insights, Reddit’s Data API Terms remain unchanged, ensuring non-commercial usage remains free within the published threshold.
RDDT Earnings Estimates Show Mixed Trend
For the first quarter of 2025, RDDT expects revenues between $360 million and $370 million. For the first quarter of 2025, the Zacks Consensus Estimate for revenues is pegged at $372.59 million, indicating year-over-year growth of 53.35%.
The consensus mark for loss is pegged at 4 cents per share, which declined 7 cents over the past 30 days. The figure indicates a year-over-year decline of 113.79%.
Reddit Inc. Price and Consensus
Reddit Inc. price-consensus-chart | Reddit Inc. Quote
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
What Should Investors Do With RDDT Stock?
Reddit intends to drive top-line growth and enhance its growth prospects by focusing on expanding its advertising business, increasing its international reach, and improving the user experience with upgraded search and discovery features.
However, in the fourth quarter of 2024, Reddit experienced some volatility due to a periodic algorithm change by Google Search. This triggered a fluctuation in traffic, primarily affecting logged-out users.
Macroeconomic uncertainties, along with intense competition from other social media platforms, are consistently affecting user engagement and market share in advertising. Stretched valuation also remains a concern.
Reddit carries a Zacks Rank #3 (Hold), which implies investors should wait for a more favorable entry point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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