What Happened?
Shares of online community and discussion platform Reddit (NYSE:RDDT) fell 19.8% in the pre-market session after the company reported mixed fourth-quarter results: revenue, EPS, and EBITDA all outperformed Wall Street's estimates, but lower-than-anticipated domestic user growth weighed on investor sentiment. Reddit also provided optimistic revenue and EBITDA guidance for the next quarter, which blew past analysts' expectations.
Overall, it was a decent quarter with its GAAP financial metrics above expectations, but the lower-than-anticipated domestic user additions are sending shares lower.
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What The Market Is Telling Us
Reddit’s shares are extremely volatile and have had 54 moves greater than 5% over the last year. But moves this big are rare even for Reddit and indicate this news significantly impacted the market’s perception of the business.
The previous big move we wrote about was 29 days ago when the stock gained 7.8% on the news that the major indices soared (Nasdaq +1.9%, S&P 500 +1.6%) after the Bureau of Labor Statistics reported that core CPI (Consumer Price Index - a measure of inflation which strips out volatile food and energy prices) for December 2024 came in better than expected, rising 3.2% year over year, compared to the consensus estimate for a 3.3% increase. This means that PPI and CPI both came in slightly below expectations. It is important because the results take additional rate hikes off the table, which some investors and market participants were beginning to whisper about.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
In addition, the earnings season started off strongly: Banking giants like JP Morgan and Goldman Sachs posted solid quarterly results, further lifting investor sentiment. The true test will come in the coming month or so as the bulk of large publicly-traded companies report their result.
Separately, social media stocks soared after reports revealed that Chinese officials are considering several options, including selling TikTok's U.S. assets to Elon Musk, the owner of social media platform X (formerly Twitter).
Separately, Deutsche Bank named the stock a Top Pick for 2025. The firm added "As we look forward to 2025, we think successful themes of 2024 will similarly dictate stock action and sentiment this year. In particular, we think the combination of durable topline trends and positively inflecting margins will be the minimum requirements for favorable flow of funds."
Reddit is up 22.4% since the beginning of the year, but at $203.14 per share, it is still trading 9.8% below its 52-week high of $225.23 from February 2025. Investors who bought $1,000 worth of Reddit’s shares at the IPO in March 2024 would now be looking at an investment worth $4,027.
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