A bunch of Reddit users drove up the share price of embattled company GameStop (GME) to over $400 in 2021, causing a short squeeze and pushing trading platform Robinhood to halt stock purchases temporarily. And now, Reddit’s user base has grown to a new high.
The social media company posted its financial results for the second quarter on August 6. Revenue increased 54% year-over-year to $281.2 million, beating the anticipated $254 million. It lost six cents per share, compared to the expected loss of 32 cents.
Related: Analysts revamp Reddit stock price target ahead of earnings
Reddit’s Daily Active Uniques (DAUq) for the quarter increased 51% from a year ago to 91.2 million. “We had a strong quarter across the board, and more people are visiting Reddit than ever before,” said CEO Steve Huffman.
But Reddit shares lost 7% after the earnings.
“You’d have to bend over backwards to convince yourself Reddit has any sort of long potential,” commented Reddit user “ModestBanana” after seeing the share price drop despite upbeat financial results.
Reddit hasn’t been profitable for nearly 20 years
Founded in 2005, Reddit stayed private for nearly two decades before going public in March 2024, and it has yet to become profitable.
Reddit shares began trading on the New York Stock Exchange on March 21. The initial offering price was $34 per share, while shares opened at $47 and closed at $50.4 on the first trading day.
Vanderbilt University’s assistant finance professor Josh White said Reddit's IPO reflected investors' willingness to ignore the company's losses because of its potential growth—a trend not seen for at least three years, according to Reuters.
Reddit has over 100,000 online communities known as "subreddits," which host discussions on topics ranging from "the sublime to the ridiculous, the trivial to the existential, the comic to the serious," according to Huffman.
As of May 2024, Reddit ranks sixth among the top 10 most-visited websites globally, just behind Wikipedia, according to Semrush’s data.
The company’s revenue consists mainly of ad sales, accounting for 90% of its haul. Ad revenue increased 41% to $253.1 million in the second quarter.
Reddit user “badazzcpa” felt that the company “doesn’t have a great model for making profit.”
“I have noticed that since they went public I have 5-10 times the amount of ‘promoted’ posts in my feed. The ads are easy to spot, and I scroll right by them without having a clue what they are selling. The only ads I have clicked on were by mistake as I was scrolling,” the user said.
Related: Reddit makes a bold move that users may not like
Despite relying mainly on ads as its core business, Reddit emphasized AI as a growth area during its IPO and said during the Q2 earnings call that it would begin testing AI-powered search results.
“Later this year, we will begin testing new search result pages powered by AI to summarize and recommend content, helping users dive deeper into products, shows, games and discover new communities on Reddit,” Huffman said.
Reddit user “kuschelig69” confirmed receiving an admin message with a survey asking if they were aware of AI on Reddit.
Looking ahead, Reddit shares may face short-term market turbulence as the post-IPO lockup period expires 180 days after the March offering, allowing insiders to sell their shares.
Reddit now expects its revenue for the September quarter to be between $290 million and $310 million.
Analysts raise Reddit stock price targets and rating
Bank of America has raised Reddit’s price target to $60 from $57 and keeps a Neutral rating following a strong Q2 and a Q3 revenue outlook.
The analyst believes the company's revenue guidance is "likely conservative" and that Q3 will "likely be peak growth," but also warns of a potential slowdown due to more challenging Google traffic comps in the second half of 2024.
More Wall Street Analysts:
- Analysts reboot Amazon stock price targets after earnings
- Analyst reboots Rivian stock price target on updated plans
- Analysts reboot Arm Holdings stock price target following earnings
Piper Sandler analyst Thomas Champion also raised Reddit’s price target to $70 from $65 and keeps an Overweight. “User growth looks sustainably stronger at least through year-end, while the nascent ads business gains scale,” the analyst said.
Loop Capital upgraded Reddit to Buy from Hold before the earnings release, keeping its price target of $75. The analyst said the shares have retreated almost 20% since July 15, and the price target now offers a 23% upside potential.
Reddit stock traded around $50 on August 7.
Related: Veteran fund manager sees world of pain coming for stocks
