Reddit Has Been One of the Worst Stocks in the S&P 500. Here's Why It's a Buy.

Reddit’s Q2 revenue jumped 61% YoY, marking its eighth consecutive quarter of 60%+ YoY growth, with net income nearly tripling YoY. Advertising revenue grew 64% YoY and represents ~95% of total revenue, enabling a $235M share repurchase in the quarter; users also expanded (daily actives +18% YoY; weekly actives 514.6M, +24% YoY). Despite the stock down more than 30% YTD, the article argues fundamentals and user momentum justify a rebound, with the stock trading at a 30.5 forward P/E.

Analysis

The market is still treating RDDT like a vulnerable ad-cycle story, but the mechanism here is more powerful: improving user scale plus unusually fast U.S. monetization creates operating leverage that can keep EPS compounding even if revenue growth normalizes. The key is not whether growth is high today; it is whether management can preserve a premium growth rate while the business transitions from “growth at any cost” to “high incremental margin,” which is what justifies a premium multiple.

Second-order winners are the ad budgets that need high-intent communities, not broad-reach impressions. If Reddit keeps converting users without squeezing the ad load too hard, it can pull spend from lower-trust social inventory at SNAP and, to a lesser extent, PINS, especially for performance advertisers hunting incremental reach. The hidden risk is dependency on search referrals and platform traffic quality: if that softens for even one or two quarters, the stock can rerate down quickly because the valuation assumes the current engagement slope persists.

The consensus may be underestimating how much of the upside is already in the valuation. At roughly 30x forward earnings, the stock is not expensive if growth stays north of 40% and margins keep expanding, but it becomes fragile if U.S. user growth slows into the mid-single digits or ARPU growth decelerates meaningfully. AI data licensing is optionality, not the thesis; if investors start capitalizing it as durable recurring revenue before disclosure proves it, that is a setup for disappointment over the next 1-3 quarters.

Key Decisions for Investors

• Buy RDDT on post-earnings weakness only; best entry is a pullback after the next guide-up quarter. Use a 3-6 month call spread rather than outright stock if you want upside exposure, because the main risk is 20%+ multiple compression on any deceleration.
• Pair trade: long RDDT / short SNAP over the next 1-3 months. Thesis: Reddit has cleaner monetization momentum and better engagement quality; SNAP still looks more exposed to ad-budget volatility and weaker pricing power. Cut the pair if RDDT U.S. WAU growth drops below high-single digits.
• Relative-value alert: if RDDT rerates above ~40x forward EPS without an upward revision to 2026 revenue or margin guidance, fade the move versus META or a cash proxy. The stock can outrun fundamentals near term, but the multiple is sensitive to any sign of normalization.
• Set a thesis-failure watch: U.S. WAU growth below 7-8% or U.S. ARPU growth below 40% on the next two quarters. That would imply the current growth curve is inflecting down and the premium valuation is no longer defensible.