Two weeks ago, I wrote that Reddit (RDDT 1.75%) was one of my picks as a stock to buy on the dip and hold for the next decade. I was confident in the company's upcoming earnings report and its growing profits.
Fast-forward to today, and Reddit is smoking hot, up 43% in the last week on the strength of its glowing second-quarter filing. The dip is over, but do you still have an opportunity to take a position in Reddit stock? Or should you wait for a better buying opportunity?
Reddit shows huge numbers
The biggest figure in the second-quarter earnings report is rapid revenue growth. Reddit reported $500 million in revenue, up 78% from a year ago, marking its fastest quarterly growth since 2022. It was the company's most profitable quarter.
RDDT Revenue (Quarterly) data by YCharts.
There was also a 21% increase in daily active users, a number that reached 110 million in the quarter. The company posted a profit of $89 million and $0.48 per share, versus losses of $10 million and $0.06 per share in the second quarter of 2024.
Reddit stands out from social media platforms like Meta Platforms' Facebook and Instagram because, by design, its users are anonymous. The platform is organized into structured "subreddit" communities where people can talk about anything -- including their favorite games, cars, and movies, as well as current events. Because subreddits can be devoted to very specific topics, conversations are usually on point and user moderators can halt any spam or threads going off-topic.
"For people, conversation and connection are becoming more valuable and rare," CEO Steve Huffman wrote in a letter to investors. "In a world increasingly dominated by algorithms and automation, the need for human voices has never been greater. We see this every day as nearly 50 million scrollers come to Reddit for their favorite communities, and 60 million seekers land on Reddit in search of better answers to their questions."
The company posted Q3 guidance for revenue of between $535 million and $545 million, which would be a 55% gain from a year ago.
Image source: Getty Images.
What's next for Reddit?
While Reddit gets more than 80% of its revenue from the U.S., it's taking steps to grow its international presence. The company is embracing machine translation in order to allow Reddit to expand in Asia, Europe, and Latin America, and is currently targeting around two dozen languages. By expanding internationally, Reddit has the opportunity to increase marketing, add local content and contributors, and create specialized subreddits to serve international markets. While international revenue increased by 71% to $91 million in the second quarter, this is a massive opportunity to grow the company.
Reddit is also embracing artificial intelligence (AI) to make its platform more relevant. The Reddit Answers tool is an AI search engine specifically geared toward Reddit content and can help people find answers on the platform. The company says its core search product has 70 million weekly users, and that Reddit Answers grew from 1 million users in Q1 to 6 million in Q2. By rolling Reddit Answers out globally, it can sell advertising in its search engine much as Alphabet's Google does.
Should you invest in Reddit stock?
By any measure, Reddit is an expensive stock, particularly compared to Meta, which operates the highly successful platforms Facebook, Messenger, Instagram, Threads, and WhatsApp. It's also more expensive than Snap, which operates the Snapchat platform:
RDDT PE Ratio (Forward) data by YCharts.
While I still think that holding Reddit stock is a good idea, I do think it's pretty pricey right now. Up 260% in the last year, Reddit appears to be overvalued; if I were buying a social media stock at these prices, I would lean toward Meta right now.
I have full confidence that Reddit will hit its third-quarter revenue numbers, and I'm eager to see if it can increase its international audience and open the door for long-term revenue growth. Reddit is a solid stock, but I think investors should wait for a better buying opportunity before taking a position.
