Reddit (RDDT 4.01%) and Unity Software (U 0.49%) are two former high-flying growth stocks that are trading well off their previous peaks. Sometimes stocks fall for good reasons, but at other times, a discounted share price can be a great buying opportunity.
Let's look at why these stocks fell, how the underlying businesses are performing, and whether they can recover their former glory.
Image source: Getty Images.
1. Reddit
Reddit has reported strong revenue growth since completing its initial public offering (IPO) last year. But the stock has fallen from its recent highs over concerns about the potential for a slowing ad market and competition in the digital advertising market.
The recent sell-off is a good buying opportunity, as Wall Street still underestimates the power of Reddit's highly engaged user base.
Despite uncertainty with the ad market and Wall Street's concerns over competition, Reddit reported robust revenue growth in the first quarter. Daily active unique users grew 31% year over year to 108 million, while ad revenue surged 61% to $359 million.
In June, Reddit announced new ad tools that promise to drive more advertising demand. These new tools are powered by artificial intelligence (AI) and will provide marketers real-time insights into discussions happening on Reddit.
Reddit is also bringing AI features to its users. Reddit Answers reached 1 million weekly users in Q1. It's basically a ChatGPT-style chatbot that pulls answers from all the discussions happening on Reddit's platform.
Reddit is growing much faster than other social media companies like Pinterest, Meta Platforms, Snap, and even Google's search business. It has a lot of valuable data on its platform, which it's monetizing by licensing it to other AI companies for use in training their models.
While the stock has already rebounded about 50% from its recent lows, it's still trading 36% off its all-time high. Analysts are expecting the company to report year-over-year revenue growth of 51% for Q2, according to Yahoo! Finance.
Another strong quarter could push the stock higher, but regardless of where the stock trades in the near term, Reddit appears on track to grow into a more valuable business down the road. Its AI investments and data are underappreciated by Wall Street, making the stock worth holding for the long term.
Image source: Getty Images.
2. Unity Software
Unity is one of the most widely used game engines that developers use for making video games. It offers a suite of tools to make games for all the major platforms (mobile, PC, and console). It was a fast-growing business through 2023, regularly reporting more than 20% quarterly revenue growth. But the combination of an expensive valuation amid falling revenue has weighed on the share price the past few years.
The stock is down 86% from its previous highs. CEO Matthew Bromberg stepped in last year to turn the business around. Management is exiting non-essential products and services and returning Unity's business to focus on high-growth and high-margin revenue opportunities.
Investors looking at Unity's recent financial results won't see much to like. Its "portfolio reset" was responsible for the 6% year-over-year decrease in revenue last quarter. However, Bromberg's strategy could get the business back on track and unlock Unity's full potential, which isn't reflected in the stock's valuation.
Unity just completed the migration of its advertising business to its new, AI-powered platform, Unity Vector. This will allow Unity to provide deeper insights in order to deliver better advertising results for its customers. Management indicated that this won't be fully reflected in its Q2 revenue, but Vector puts the company's Grow Solutions segment, which made up two-thirds of the business last quarter, on course to deliver strong growth over the long term.
The other part of Unity's business is its Create Solutions segment, which posted an 8% year-over-year decline in revenue last quarter. This includes revenue from the tools Unity sells to game developers. It is planning three important updates to its Unity 6 software this year. One of these updates includes AI features that will help developers build games faster. This could be a significant demand driver for Unity's software.
While the company's financials look like a mess, the stock could move higher over the next year as the company returns to profitable growth. Analysts expect revenue to decline 2% for 2025 before growing 9% next year to $1.9 billion. By 2029, analysts expect Unity's focus on investing in more profitable opportunities to grow adjusted earnings per share to $2.34.
The stock is currently trading at just 13 times 2029 estimates, which is cheap. This growth stock could trade over 20 times earnings, potentially doubling the share price in the next four years.
