Is Reddit Stock a Buy After Dropping Over 50% From Its 52-Week High?

Shares of social media company Reddit (NYSE: RDDT) were once on fire. In February, the stock soared to a 52-week high of $230.41.

But then the macroeconomic picture became murky, with President Donald Trump's tariff policies adding to fears about the economy. Many stocks sank, including Reddit. Its shares were also affected when some Wall Street analysts raised concerns about Reddit's ability to maintain its impressive business growth.

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With the stock down 56% from its high, does the price drop present a buy opportunity? To answer that question, here's a deeper dive into the company.

Image source: Getty Images.

Reddit's business performance

This model has proven successful. In the first quarter, Reddit grew daily active unique users (DAUq) by 31% year over year to 108.1 million. Each DAUq represents a person visiting Reddit's website or mobile app at least once in a 24-hour period.

Fueled by a healthy and growing user base, Reddit produced sales of $392.4 million in the first quarter, an astounding 61% increase over the prior year. This performance extends the revenue momentum seen in 2024, when sales rose 62% year over year to $1.3 billion.

Moreover, Reddit management is controlling business costs with exceptional skill, resulting in an astonishingly high Q1 gross margin of 90.5%. Contrast this to Google parent Alphabet, which dominates the search engine and digital advertising industries, yet exited Q1 with a gross margin of 60%.

Reddit's excellent revenue expansion and cost management in Q1 led to net income of $26.2 million and free cash flow of $126.6 million, which it can employ for business growth.

Reddit's growth strategy

Speaking of growth, Reddit is working to increase DAUq by expanding internationally. It's using artificial intelligence (AI) to translate its extensive English-language community content into other languages. This initiative propelled Brazil's DAUq growth to a record 80% in Q1.

On the revenue front, Reddit is testing shopping-related advertisements, called dynamic product ads (DPA). Many users go to Reddit seeking product recommendations from others, and the company can show them DPA to generate sales for advertisers.

However, Reddit isn't free of challenges. It's dependent on search engines, such as Google, for a portion of its visitors. Google's dominant market share in search means that its algorithm changes can boost or reduce Reddit's visitors.

Similarly, the rise of AI is a threat to Reddit's business, since people can ask large language models for answers instead of Reddit. Certainly, some portion of internet users will do so, but as CEO Steve Huffman explains, others "come to Reddit for real opinions from real people." So AI is far from a death knell for its business.

As for its reliance on Google, Huffman noted: "We do expect some bumps along the way from Google because we've already seen a few this year. This is expected in any year."

And Reddit knows how to thrive over the long run. The company celebrates its 20th birthday in 2025, a testament to its ability to endure the ups and downs of Google's search algorithms.

Deciding on Reddit stock

Despite the dynamic macroeconomic climate, Reddit estimates Q2 revenue will reach a range of $410 million to $430 million. That would be a strong increase over the prior year's $281.2 million.

In addition, the company boasts a strong balance sheet. It exited Q1 with total assets of $2.4 billion, compared to $219.9 million in total liabilities. Its hefty war chest of $1.9 billion in cash, cash equivalents, and short-term investments gives it plenty of financial flexibility.

Between its strong financials and its track record of success growing its sales and user base, Reddit is a solid company to invest in. So the question is whether the share-price plunge from its 52-week high means the stock is a buy.

To assess this, let's look at the forward price-to-earnings (P/E) ratio, which gauges stock valuation by telling you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months:

Reddit forward price-to-earnings (P/E) data by YCharts.

Reddit's forward earnings multiple was sky-high toward the end of 2024, but with this year's stock-price drop, it's substantially lower at the time of this writing. This means Reddit shares are more reasonably priced now compared to a few months ago.

Another consideration is the stock's return on equity (ROE). This metric reveals a company's effectiveness at generating profit from shareholders' invested capital:

Reddit return on equity (ROE) data by YCharts.

Over the past year, Reddit's ROE has steadily improved, finally reaching positive territory in 2025. If the trend continues, investing in the company could lead to increasing shareholder returns over time, thanks to Reddit's efficient money-making abilities.

Given its more reasonable forward P/E and strong business performance, Reddit looks like a worthwhile investment to buy and hold for the long term.

Should you invest $1,000 in Reddit right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet and Reddit. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.