Reddit stock fell Thursday following a Q4 earnings report that showed slower-than-expected user growth. The strong-performing IPO stock pared its losses throughout the day, however, as analysts offered bullish commentary.
Reddit said late Wednesday that it averaged 101.7 million daily active users during the December quarter. That missed analyst average projections of 103 million, according to FactSet.
Chief Executive Steve Huffman told analysts Wednesday that the company had to adjust around changes from a key source of traffic.
"Late in Q4, we did experience some volatility from Google search triggered by a periodic algorithm change," Huffman said. "But traffic from search has recovered so far in Q1 and we've regained momentum."
An analyst with Morgan Stanley who is bullish on Reddit published a client note Thursday called "Buy The Google Blip Dip."
"Given the importance of user growth to the long-term multiple, and this reminder of Reddit's sensitivity to Google changes (which happen regularly), this miss may create pressure on the name – until 1Q earnings in an extreme case," wrote Morgan Stanley analyst Brian Nowak. "If this happens, we are buyers of Reddit, as we believe this was not a major change and believe that Reddit's relationship with Google remains strong."
On the stock market today, Reddit fell 5.3% to close at 204.95. Shares were down by more than 15% initially following the report late Wednesday.
The stock found support above its 21-day moving average.
Reddit Stock's High Expectations
Coming into the report, Reddit shares had soared more than 300% in the 11 months since the company's IPO. New Street Research analyst Dan Salmon told clients that Wednesday's late drop represented Reddit stock "giving back some of its recent, considerable outperformance."
But the user growth issue was "the only notable setback," Salmon added.
Reddit's earnings of 36 cents per share in the December quarter beat expectations of 25 cents per share, according to FactSet. Meanwhile, sales grew 71% year-over-year to $427.7 million. That marked an acceleration from 68% growth in the third quarter and beat estimates of $405 million.
Users Adding 'Reddit' To Google Searches
Still, overall daily user growth slowed to 39% in Q4, compared to 47% in the third quarter.
Reddit's relationship to Google is something that investors have been watching closely. Google helps funnel users to Reddit. But Huffman acknowledged on Reddit's third-quarter earnings call in October that Google and its algorithms can "giveth and taketh away."
Huffman declined to say what exact changes Google made when asked by an analyst Wednesday. But Huffman's letter to investors Wednesday spun the episode as a positive signal for the staying power of Reddit.
"Our teams have navigated numerous algorithm updates and did an excellent job adapting to these latest changes effectively," Huffman said in a letter to investors letter said. "This particular swing was interesting, though, because we saw a corresponding increase in the query term 'reddit,' which suggests users are searching with the specific intent of reaching Reddit, and this propensity continues to rise"
On that note, the company gave an upbeat forecast for the current quarter. Reddit said it expects sales of $365 million at the midpoint of its guidance. That was ahead of analyst estimates of $358 million.
Further, Reddit said it expects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $85 million for the March quarter, compared to analyst estimates of $73 million.
Analyst View On Reddit Stock
Prior to Wednesday's late slide, Reddit's rally had been powered by strong advertising sales growth and moves to boost revenue through data licensing agreements with AI developers OpenAI and Google.
Analysts with Piper Sandler maintained their bullish outperform view following the report, telling clients late Wednesday that the issue with Google "sounds to us like an aberration."
"Reddit remains a favorite name and we continue to see upside to estimates driven by strong user growth, data licensing ramping, new ad products and industry-leading incremental margin," Piper Sandler analyst Thomas Champion wrote to clients.
On the other hand, Bernstein analyst Mark Shmulik said "the blip raises the key question of Reddit's control over their most critical KPI (key performance indicator) of domestic engagement." Shmulik rates Reddit stock at underperform.
Reddit Stock On IBD 50 List
Meanwhile, Reddit stock has a stellar IBD Composite Rating of 98 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Reddit stock is also on the premier IBD 50 list, as well as IBD's IPO Leaders and Tech Leaders lists.
