Reddit(NYSE: RDDT) is known as a hot spot for crowdsourced discussions, which can sometimes include questionable content. That reputation as the "Wild West of the internet" has extended to its volatile stock price. At the time of writing, shares of Reddit surged 126% since its 2024 initial public offering yet are down about 50% from their 52-week high.
This recent weakness could offer investors a buy-the-dip opportunity following a fantastic quarterly earnings update from the social media innovator.
Here are three reasons I believe Reddit stock is a buy right now.
Image source: Getty Images.
1. A rapidly expanding user base is driving profits
Approaching its 20th anniversary since its launch in June 2005, Reddit evolved significantly. Unlike most social media platforms that prioritize individual profiles or influencer-led content, it distinguishes itself with "subreddits" -- user-created communities tailored to specific interests, ranging from global issues to niche hobbies. This ecosystem fueled growing popularity by empowering users to engage in shared experiences within self-governed groups.
For the period ended March 31, Reddit's daily active uniques (DAUq), its operating metric for users, climbed 31% year over year to 108.1 million. The company also counts on 401.3 million weekly active uniques. Efforts to enhance user and community personalization, along with expanded video integration, translated into jumps in both engagement and monetization.
First-quarter revenue reached $392 million, growing 61% year over year and surpassing Wall Street estimates of around $370 million. Similarly, Reddit's $0.13 earnings per share (EPS) marked a significant surprise against expectations of $0.02.
Beyond advertising, the company generates 9% of total revenue from other sources, including premium ad-free subscriptions and virtual items for users to purchase. This category saw sales increase 66% in the first quarter, adding to cash flow and diversification. The company now generates $3.24 in average revenue per unique (ARPU), up 24% from the prior-year quarter.
Optimism that Reddit has reached an inflection point toward more consistent and profitable growth could make the stock a good bet for investors.
2. International momentum
Compared to social media giant Meta Platforms and its nearly 3.4 billion daily active users worldwide across platforms like Facebook and Instagram, Reddit is relatively small. Yet its appeal as an investment lies in its ability to capture market share in online screentime with its platform fostering more localized communities.
International momentum has accelerated, with DAU growth of 41% year over year in the last quarter. While Meta Platforms reported 15% revenue growth outside the U.S. and Canada in its most recent first quarter, Reddit's 82% increase in international revenue stands out.
Management cites collaborations with local subreddit moderators to support onboarding and accessibility, particularly in emerging markets. The integration of artificial intelligence (AI) enabled more-natural language translations and a seamless user experience in different regions, supporting advertising conversions.
Investors who believe Reddit's market opportunity is just beginning have plenty of reasons to buy and hold the stock for the long run.
3. A path for S&P 500 index inclusion
Reddit's success in scaling platform monetization represents a key theme for the company. For full-year 2025, Wall Street analysts project 42% annual revenue growth alongside an EPS estimate of $1.23, reversing 2024's loss of $3.33 per share.
This path to a full year of profitability under generally accepted accounting principles (GAAP) opens the door for Reddit to be added as a constituent in the S&P 500 index later this year or in 2026. While not yet confirmed, the company already meets several criteria, considering its $21 billion market capitalization, sufficient trading liquidity, and the necessary governance requirements.
Inclusion in this large-cap equity benchmark would mark a significant milestone for Reddit, signaling its status as a mature industry leader. Furthermore, joining the S&P 500 would reinforce its growth narrative and attract a broader investor base as a stock price catalyst.
Pricey, but worth it
Trading at 15 times sales as a price-to-sales ratio and a forward price-to-earnings ratio of 88 makes it an objectively pricey stock. Nevertheless, the market tends to reward companies generating hypergrowth, with Reddit's earnings trajectory justifying a premium valuation. I'm bullish and believe all the pieces are in place for the company to reward shareholders in the long run.
Should you invest $1,000 in Reddit right now?
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
