Is Reddit Stock Finally Too Cheap to Ignore?

The only safe bet ahead of Reddit (NYSE: RDDT) posting fresh financials on Thursday afternoon was that the stock would be on the move. The company behind the wildly popular online forum posted better-than-expected results after the market close on Thursday. The stock did move on the news, but not in a way that Reddit investors wanted.

Reddit stock was trading more than 10% lower in the hours after its second-quarter results. The numbers were solid, but naturally, posting its eighth consecutive quarter of topping 60% top-line growth and profits more than doubling weren't enough. This seems like a golden opportunity to consider Reddit, with shares trading at a steep discount to its recent growth rate.

Let's dive into the actual numbers. It also makes sense to size up the knocks from this report, since the performance clearly wasn't well received by the market. Reddit or not, here I go.

Image source: Getty Images.

A community of compounding opportunities

Reddit has been able to expand its community at a double-digit year-over-year clip for years. Reaching 514.6 million weekly active unique visitors -- a 24% jump from where it was a year ago -- this is truly a global juggernaut. Daily active uniques climbed 18% to 130.3 million.

The "community of communities" is growing its audience at a heady pace, but its revenue is growing even faster. Reddit's top line soared 61% to reach $805 million in the second quarter. When Reddit stock went public at $34 in early 2024, it generated $804 million in revenue for all of 2023, growing its business at a respectable 20%. It's now growing 3 times faster, and it just generated more revenue in a single quarter than it did for all of 2023.

Reddit's revenue gains are impressive, but the story gets even better as we work our way down to the bottom line. Net income almost tripled, skyrocketing 185% to $283 million or $1.25 a share. This has become a high-margin business. Work the math, and it's a net margin of 31%. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) more than doubled to $343 million, a 43% adjusted EBITDA margin. Free cash flow shot 135% higher to $261 million.

Analysts were modeling only $0.96 in earnings per share, with 46% top-line growth. It was a beat, but it's not fair to call it an earnings surprise. Just check out how far ahead of Wall Street's profit targets Reddit has landed in its last five quarters.

Data source: Yahoo! Finance.

Coming through with monster bottom-line beats isn't an anomaly. For now, it's a default setting. Reddit stock may have more than quadrupled since going public a little more than two years ago, but the story continues to get better and better, Friday's initial stock swoon notwithstanding.

Sigh of the times

It wasn't a perfect report. It would be better to see daily active uniques outpacing weekly uniques, a step up in engagement. Revenue growing much faster than the platform's community is a sign of improving monetization, but it might not be sustainable in the long run. There were also some concerns about engagement with U.S. users, as well as the widening monetization gap between stateside users and international visitors.

Reddit's more than half a billion users don't have to pay to use its rapidly expanding collection of subreddits. Like many popular free platforms, it's ad-supported. It's not the only way that Reddit makes money, even if it currently accounts for nearly 95% of its revenue mix. Reddit offers a lightly used premium tier, but one revenue stream the market is watching closely these days is how leading AI platforms are paying Reddit to scour its conversations to train and improve their models.

It didn't offer any substantive insight into data licensing renewals with the major AI platforms on the subsequent analyst call, a sticking point for some investors. Reddit did note that it's still a win-win partnership. With now 26 billion cumulative posts on Reddit -- and 130 million visitors daily -- it's the largest pool of realistic, human conversations to help train and ground AI models. This remains a thin slice of the revenue pie, but investors will be able to breathe a little easier if renewals are completed on favorable terms.

Finally, Reddit's new guidance calls for 47% to 49% growth in the current quarter. If folks are selling the stock today, fearing that the two-year streak of exceeding 60% quarterly top-line increases is over, they might want to revisit what Reddit said three months ago. It was only forecasting 43% to 45% revenue growth for the second quarter, and reality proved substantially kinder.

Reddit was already cheap at Thursday's close when the stock was higher and forward profit targets were lower. The shares were trading at 27 times next year's Wall Street earnings forecasts. This is already a discount to its growth, and the multiple will get even smaller as those analyst numbers start moving higher. Reddit will be fine, even if the initial market reaction suggests otherwise.

Rick Munarriz has positions in Reddit. The Motley Fool has positions in and recommends Reddit. The Motley Fool has a disclosure policy.