Reddit’s stock soared more than 10% on Tuesday, marking a significant turnaround after a three-day decline. This slump was part of a broader downturn affecting technology stocks. The momentum shift can be attributed to a recent analyst report from Loop Capital, which reinforced a buy rating and described Reddit’s shares as “extremely attractive.” The report emphasized that the company’s recent 50% share price drop is “excessive” and highlighted Reddit’s potential for significant upside based on street estimates within its coverage universe.
Despite the positive movement on Tuesday, Reddit shares remain approximately 30% lower compared to their closing price last Wednesday. The lift in share price is a direct response to an encouraging analysis suggesting that the company has the strongest upside potential among its peers.
Earlier this year, Reddit experienced a steep decline exceeding 15% in February after it reported disappointing fourth-quarter user growth, attributed to changes in Google’s search algorithm that impacted traffic sources. Although the company has shared that the effects of this algorithm shift have lessened, the initial user shortfall unnerved investors.
Reddit’s struggle is reflective of broader trends in the tech sector, which has seen declines for major players like Apple, Nvidia, and Tesla amidst recession fears and economic uncertainties. This has contributed to significant losses—over $750 billion—in equity market value recently.
In the analyst note, Loop Capital’s managing director, Alan Gould, acknowledged the current “risk-off” market environment. However, he pointed out that Reddit had been among the best-performing stocks over the past year, notwithstanding its recent downturn. “RDDT significantly surpassed our and market estimates for 2024,” Gould stated, underscoring the company’s explosive growth—from an initial public offering (IPO) price of $34 to a peak of $230 in under a year, due to increasing revenues and enhanced advertising capabilities.
For the fourth quarter, Reddit reported sales growth of 71% year-over-year, totaling $428 million, making it the fastest growth rate recorded since 2022. This robust growth has led Gould to advocate for a reassessment of RDDT’s valuation based on its recent earnings performance and ongoing prospects for growth, particularly through improvements in average revenue per user (ARPU) and data licensing opportunities.
