Reddit Stock Confirms More Upside Potential for Upcoming Quarters

Key Points

• Reddit delivered another quarter of double-digit growth across the business, giving Wall Street analysts more reasons to boost the stock.
• Institutions have been buying the stock this quarter, and consistently positive free cash flow helped raise price targets. 
• Short interest is plummeting, though it is still high enough to trigger a short squeeze for Reddit stock. 

After the stock market started a brief sell-off this week, most market participants let their emotions get the best of their portfolios, either selling out of stocks that they should never let go of or even starting prematurely buying the dip on the entire market, which is just as detrimental as letting go of winning names.

However, it is as vital as ever to stick to strong fundamentals and growth during these volatile times, and the current second quarter 2024 earnings season might have a few of these stocks. Within this list is one social media platform, Reddit Inc. NYSE: RDDT, a stock that trades at only 76% of its 52-week high price. While the bearish price action might scare most shareholders away, it also creates a potential opportunity for some of the more savvy investors in the market.

After delivering a stellar second-quarter 2024 report, most investors would have expected Reddit stock to start trading at or near highs. However, that’s just not the case. The day after blowing past quarterly expectations, Reddit stock is now down by over 7.5%, a sell-off arguably more linked to the broader S&P 500 sell-off than something inherently wrong with the company itself.

Reddit Stock Drivers Accelerate Growth Prospects

There’s a reason Wall Street analysts expect Reddit stock’s earnings per share (EPS) to narrow their net losses of $4.68 today to $0.48, nearly a tenfold improvement in the span of a year. As bold as these forecasts may seem, they err on the realistic side of the fundamental picture today.

When digging inside Reddit’s second-quarter earnings press release, investors can really pinpoint where the main drivers are working to deliver on these optimistic Wall Street projections. Starting with the most common metric, particularly for younger companies like Reddit, revenue reached $281.2 million, or a 54% jump over the past 12 months.

The daily average users (DAUs) drove this revenue, which clocked in 91.2 million for the second quarter, or a 51% jump over the year. More than that, global reach is present for Reddit, as international DAUs also grew by 44% in the year.

Of course, the number of users is nothing but a vanity measure, as the fundamental metric for investors is how much these individual users can be monetized. Average Revenue Per User (ARPU) reached $3.08, or 2% up on the year. While revenue per user takes a bit longer to realize, the user growth has boosted enough net revenue to make investors feel more comfortable.

As Reddit is part of the technology sector, high gross margins are to be expected, and they fulfilled these expectations. Gross margins reached 89.5%, up from 84.2% from 2023. While net income improved significantly over the year, it still came in at a net loss of $10.1 million, which doesn’t necessarily mean bad news.

A better measure of profitability is free cash flow (operating cash flow minus capital expenditures), which reached $27.2 million for the second quarter. This is a massive increase from the negative free cash flow of $54.9 million from the previous year.

Wall Street Relies on Reddit Stock Momentum for Higher Price Forecasts

Financial momentum that is, and Reddit has delivered enough of that to help Wall Street analysts place a fair value on this company. That is why those at Piper Sandler have placed a $70 price target for Reddit stock, calling for it to rally 40.3% from where it has sold off today.

Investors can find more interesting bullish confirmation from the stock market here, some of which can help build a potentially bullish case for Reddit stock. Starting from the bearish side, there are plenty of signs of capitulation, especially as Reddit stock’s short interest collapsed by 16.6% over the past month.

Still, up to 23% of Reddit stock’s outstanding share float is held in short positions, which could trigger a short squeeze if these short sellers hit the point of maximum pain and are forced to close their short positions (which involves buying stock).

Now, asset managers and institutions looked to fill the empty seats left behind by these short sellers bailing out of Reddit stock. Bank of New York Mellon (Reddit’s largest shareholder) boosted its position by 10.1% as of July 2024, bringing its net investment up to $106.3 million today.