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

Reddit (NYSE: RDDT) has had a bad year. Its stock is down by more than 30% year-to-date, making it one of the worst-performing stocks in the S&P 500.

However, that doesn't mean Reddit is doing poorly as a company. In fact, now looks like a good buying opportunity. Reddit's year-to-date performance does not align with its fundamentals.

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Reddit's financials are soaring

A lagging stock price does not always indicate poor fundamentals, and Reddit is a good example. The social media company's revenue soared by 61% year over year in its second quarter. Net income also almost tripled year over year.

These aren't one-off results, either. This was Reddit's eighth consecutive quarter of delivering more than 60% year-over-year revenue growth. Reddit is making some money by letting artificial intelligence training companies use its data, but almost all of its revenue still comes from online ads.

Its advertising segment was up 64% year over year, and accounted for roughly 95% of Reddit's total revenue. Growth and rising margins enabled Reddit to repurchase $235 million in shares in the quarter.

This growth is built on more users joining the platform

An 18% year-over-year boost in daily active users demonstrates that the current momentum is sustainable. Some companies scramble to raise advertising costs and set fees to achieve higher revenue growth as user growth declines. However, a user base built on healthy growth makes it easier for Reddit to realize high growth rates without penny-pinching its advertisers.

It's not just daily active users that are on the upswing, either. Reddit closed the quarter with 514.6 million weekly active users, which was a 24% year-over-year increase.

Reddit trades at a 30.5 forward P/E ratio, which isn't too far off from Meta Platforms' (NASDAQ: META) 19 forward P/E ratio when considering their fundamental progress. Meta Platforms delivered only 28% year-over-year revenue growth and a 3% year-over-year uptick in daily active users.

Reddit already trades at a premium to Meta Platforms, but it's fair to argue that Reddit may deserve a higher premium. Its net income is also growing at a much faster rate than Facebook's parent company, implying that its forward P/E ratio will quickly become more attractive than its current level.

U.S. revenue is still growing at a fast rate

Another big advantage Reddit has over most social media platforms is that its U.S. user base is still growing at a respectable rate. The U.S. is the most lucrative region for online platforms, including Reddit, as seen in Reddit's financial results.

Reddit has an average revenue per user of $11.85 in the U.S., compared to a $2.26 ARPU in the rest of the world. Furthermore, U.S. ARPU was up 51% year over year, compared with 31% year-over-year growth in its international ARPU.

It has also become common for companies to report higher user and revenue growth rates in international regions than in the U.S., where markets are more saturated. However, Reddit is still delivering respectable U.S. results, with U.S. weekly active users up 9% year over year, and the international figure up 24%. Q2 was a soft spot for Daily Users in America due to "choppy" search referrals, but Reddit has seen these challenges before.

Reddit is achieving higher U.S. growth numbers than Meta Platforms' global numbers. It demonstrates Reddit still has more market share to tap into, while Meta Platforms has fewer new customers it can add to its family of apps.

International revenue is still up more than U.S. revenue, since Reddit is attracting more users from different regions. Eventually, Reddit will lean more heavily into international opportunities to drive higher revenue growth. However, with U.S. activities still playing a critical role and growing at an exceptional rate, Reddit looks poised to rebound from its lows.

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