Reddit Surges After Earnings Beat: Time to Buy?

Key Points

• Reddit posted an impressive Q3 2024, reporting its first profit since its IPO with an EPS of $0.16, significantly beating expectations.
• Shares surged by as much as 50%, closing the week up 38.8% and bringing its YTD performance to an impressive 124%.
• Following the earnings report, Citigroup and other firms raised their price targets, citing substantial advertising revenue.

Shares of Reddit NYSE: RDDT, the well-known social media giant, surged by as much as 50% last week following a stellar Q3 earnings report that sent the stock to new all-time highs. After pulling back briefly from highs on Thursday, the stock closed the week at $112.98, up an impressive 38.8% on the week, compared to the overall market’s negative 1.38% weekly performance. YTD shares of Reddit are now up a whopping 124%, compared to the technology sector’s 16.3% performance during the same stretch.

After consolidating at 52-week highs before the report, Reddit’s first profitable quarter since going public has many investors questioning whether this impressive breakout and surge will lead to higher prices in the long term and whether now could be the ideal time to buy. So, let’s break down the key factors and assess whether investors should take action.

Reddit Posts Strong Q3 and Turns Profitable

Reddit’s stock jumped as high as 40% on Wednesday after the company reported an EPS of $0.16 for Q3 2024, outperforming analysts’ expectations of -$0.07 by $0.23. The company also posted a significant 67.9% year-over-year revenue increase to $348.4 million, exceeding the consensus estimate of $313.61 million. This marked a pivotal moment for Reddit, demonstrating its capability to achieve profitability after its IPO.

The company’s Q4 guidance projects revenue between $385 million and $400 million, with adjusted EBITDA ranging from $110 million to $125 million. User growth stood out: U.S. active users rose by 51%, while international active users grew by 44%. Average revenue per user (ARPU) improved globally by mid-teen percentages, contributing to a 56% boost in ad sales. Moreover, the "other revenue" category, which includes data licensing, soared 547%. COO Jen Wong emphasized on the earnings call that Reddit's data licensing partnerships, which facilitate advertising analytics and AI model training, were pivotal growth drivers.

Analysts React With Upgrades and Higher Targets

The earnings beat prompted a wave of positive analyst reactions. Citigroup notably raised its price target for Reddit from $70 to $120, reiterating a Buy rating and emphasizing the company’s 56% surge in advertising revenue. "Advertising revenue was driven by growth in impressions, more efficient ad loading, and new conversation placement ads," Citigroup highlighted. Other leading firms, including Bank of America, Needham, and JMP Securities, followed suit, boosting their price targets in response to Reddit’s performance.

Overall, the stock holds a consensus Moderate Buy rating, with an average price target nearing $90. While this suggests some downside from current levels, continued analyst revisions could shift this outlook. Institutional investors have also shown strong interest, with 62 buyers accumulating nearly $1 billion in inflows over the past 12 months. This starkly contrasts with just four sellers accounting for almost $9 million in outflows, signaling sustained confidence in Reddit’s growth story.

Should Investors Take the Plunge?

Reddit’s notable and stellar Q3 results, accelerated user growth, and supportive analyst sentiment lay a solid foundation for future expansion. However, with the stock already up almost 40% in the past week and nearly 100% this quarter, technical indicators suggest caution. The RSI is approaching 80, signifying an overbought condition and the potential for a short-term pullback.

For long-term investors, the impressive earnings beat, promising guidance, and increasing institutional support position Reddit as an appealing growth candidate. However, those mindful of timing may prefer to wait for price stabilization and an RSI reset to lower levels. A brief pullback or consolidation could present a more attractive entry point, balancing potential rewards against short-term risks.