Since reporting its Q4 earnings in mid-February, Reddit Inc. (RDDT) stock has plunged 45% in under a month. Despite the company posting revenues well above estimates, along with big improvements in its bottom line and cash flow—leading Wall Street to revise its outlook upwards for the next few quarters—Reddit was already priced for perfection and had heavy short interest. Even a minor hiccup triggered a pullback, leading Alan Gould from Loop Capital to label the stock as “extremely attractive” following its nosedive. Since Loop Capital’s research note, the stock has bounced 14%, and I’m in line to agree, hence my bullish stance on RDDT stock.
Internally, Reddit’s woes stem from its daily active users falling short of expectations, Q1 guidance coming in slightly below estimates, and stock-based compensation being on the higher side—especially for a company that isn’t yet fully profitable on an annual basis. On a broader basis, macroeconomic concerns about Trump tariffs and risk-averse market participants fleeing stocks in favor of government bonds saw a broad sell-off in tech stocks this week. Reddit felt the brunt more than most as one of the higher beta risk-on stocks. If this week’s price action is juxtaposed with the past quarter, the story is not much different.
RDDT stock is in a slump, but therein is the opportunity. These are short-term bumps with minimal impact on Reddit’s long-term growth story. Given the more attractive valuations now compared to three months ago and top analysts backing the stock, I think Reddit is a solid buy, with the recent dip serving as a neat entry opportunity at lower levels.
Why RDDT Stock Took a Dive
First, investors should know that Reddit is a highly volatile stock. With a beta of 2.61, it’s more than two and a half times as volatile as the broader market, meaning smooth rides shouldn’t be expected. When Reddit went public in March 2024, it did so amid a bull market. On Tuesday this week, RDDT stock suffered its biggest decline since going public just under a year ago.
In its most recent regulatory filings, the social media company posted impressive top-line growth of over 60% year-over-year, supported by very strong operating metrics, which sent the stock soaring from $46 per share to $225 in less than a year—an almost 400% rise, peaking around February 7th.
While Reddit impressed the market with solid user growth—total daily active users hit 101.7 million by the end of Q4, up nearly 40% year-over-year—its valuations also surged, and so did short interest. Currently, around 16% of the float is sold short, which is quite significant. At one point, the company’s forward earnings hit 95x in January. However, after the recent selloff, that number is much more appealing at 35x.
In my view, the combination of factors, including high short interest, the stock’s dramatic rise from $40 to over $200 in less than a year, and the stock’s extreme volatility compared to the broader market, explains why Reddit shares lost about half their value so quickly. Macroeconomic effects and Trump tariff tantrums simply accelerate the prevailing sentiment.
Digging Deeper Into The Selloff Triggers
According to Reddit’s management, the disappointing daily active user results were mainly caused by changes in Google’s algorithm, which impacted the visibility of Reddit content in search results. This, in turn, hurt the flow of logged-out users (those who visit Reddit without being logged in)—a key part of Reddit’s overall traffic and user growth. This situation differs from platforms like Pinterest, Meta (Facebook), or Snap, which are mainly driven by logged-in users on their mobile apps, as those companies rely more heavily on registered users for revenue.
Like many newer tech companies, Reddit also has significant stock-based compensation expenses, which have increased over time. However, management pointed out that its fully diluted share count did decrease sequentially in Q4. Between October 2024 and February 2025, Reddit’s common shares were diluted by 4.9%, which is obviously not great news for investors. On the bright side, as Reddit continues generating free cash flow—$215.8 million in 2024 alone—it could buy back some of its shares to offset the recent dilution.
Is Reddit Oversold? Should Investors Buy the Dip?
Reddit posted excellent results for Q4 and throughout 2024, showing that its fundamentals are improving consistently. Total revenues for full-year 2024 grew by over 60% year-over-year, ad revenue increased by 50%, gross margins hit 90.5%, and the company posted strong positive cash flows.
Looking ahead, even though the Q1 guidance raised some concerns, EPS and revenue estimates were revised upward, meaning there weren’t any significant issues with Reddit’s growth story that needed to be adjusted in analysts’ forecasts. Given the expected volatility of Reddit shares, these drops can be seen as somewhat expected, especially for a stock with a significant percentage of its float shorted. However, just as the stock is likely to drop 2.6x when the broader market is down, it can rebound quickly when bulls take over again.
That said, paying 35x forward earnings, almost identical to August of last year when Reddit shares were trading at just $60 per share, doesn’t seem as appealing. But since Reddit’s growth story is holding up well, with analysts continuing to revise their forward expectations upward even after the very bearish post-Q4 earnings reaction, I would not wait for even more depressed valuations to buy the dip here.
When considering technical metrics, Reddit’s stock has a Relative Strength Index (RSI) of 22.9—below 30, which signals that the stock is oversold. This suggests that Reddit’s stock may have been sold off too much recently and could be due for a rebound.
What is the Target Price for RDDT Stock?
Wall Street analysts have dialed back their expectations for Reddit, although the broader consensus is still bullish. Out of 19 analysts covering the stock in the last three months, 12 recommend a Buy, six recommend a Hold, and only one recommends a Sell. RDDT’s average price target is $207.06 per share, which implies a significant ~69% upside from the current share price.
Reddit’s Slide is an Opportunity in Disguise
Given the volatile nature of Reddit’s stock, investors should be cognizant that RDDT is a high-risk stock with volatility coming as standard. That said, with forward earnings multiples now more than half of what they were at their peak in December, this could be a great chance to buy Reddit shares for the long haul, especially since the growth story shows no signs of structural weakness. The sharp selloff in such a short time also creates room for near-term gains, as technical indicators suggest Reddit is oversold and may be set for a quick rebound.
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