Reddit Is Down 28% This Year, but It Won't Stay That Way For Long

Reddit (NYSE: RDDT) hasn't fared too well. It has lost almost 30% of its value year to date due to concerns about Google potentially changing its algorithm and Meta Platforms (NASDAQ: META) coming out with a copycat called Forum.

Fundamentals show a different story, and as this noise becomes more distant, Reddit should rebound from its year-to-date losses.

Image source: Getty Images.

Reddit has become less reliant on Google

Although Alphabet's Google search results are still a catalyst for Reddit, the social media app has built its own ecosystem. It reached 126.8 million daily active users, representing a 17% year-over-year increase.

Reddit CEO Steve Huffman touted the company's "deeply engaged communities and authentic human conversation" as the driving force behind its success. It's that type of community that keeps users engaged and causes visitors to browse Reddit posts for answers to their questions.

This advantageous position has translated into 69% year-over-year revenue growth in Q1 and a 31% net profit margin for the growth stock. These results run contrary to Reddit's recent stock losses, and it has the foundation to build on those solid results. Reddit anticipates $720 million in Q2 revenue at the midpoint, which would represent 44% year-over-year revenue growth.

Addressing Meta Platforms

It's hard to build the brand reputation that Reddit has developed. Meta Platforms is trying to do that with Forum, and that has spooked some investors. Investors may remember how Instagram Stories took the wind out of Snapchat's sails, but Meta Platforms' copycat business model hasn't taken out all of its targets.

For instance, Instagram embraced reels to copy TikTok, but the latter still commands far more engagement per user than the former. Threads didn't replace X, showing that there are limits to how much Meta Platforms can replace competitors just by replicating their signature features.

Meta Platforms' Forum App isn't the final punch that's going to knock out Reddit. Reddit has been around for more than 20 years, making it harder to replace or dethrone for its specific brand of social media.

Investors can argue that Forum might bite into some of Reddit's market share, but that remains to be seen. Meta Platforms can devastate smaller or more recent social media apps by copying its features. Instagram Stories hurt Snapchat when it was about five years old. Instagram also copied video app Vine's key features one year into its existence, which made it more difficult for Vine to establish a long-term community and fight back.

Meta Platforms can only gain large market share from rising stars that haven't yet tapped into their potential, like Vine and Snapchat at the time. Facebook's parent company didn't dethrone X by creating Threads, and the same scenario should play out with Forum. The fear is overblown and presents a buying opportunity for Reddit investors.

Reddit is still making money from online ads

Most of Reddit's business is driven by online ads, and the company continues to optimize them. For instance, Reddit Max campaigns have reduced advertisers' costs by 17% while boosting conversions by 25%. Those types of results encourage businesses to spend more money on Reddit ads, which explains why the company delivered solid Q1 results.

Reddit also said that middle-market and small and medium-sized businesses are "increasingly adopting Reddit Max campaigns." A growth in online advertisers and enticing ad results should keep them coming back for more.

While online advertising is the main story for Reddit, it is diversifying into AI licensing deals. These deals make Reddit's content fair game for AI training and are highly profitable. They still make up a small slice of the business, but as the AI build-out continues, Reddit finds itself in a desirable position as hyperscalers seek to train their AI models with high-quality data.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Reddit. The Motley Fool has a disclosure policy.