Reddit Stock Crashes Again. Is the Stock a Buy on the Dip or a Value Trap?

For the second straight quarter, shares of Reddit (NYSE: RDDT) got absolutely pummeled following its earnings report. The stock fell 21% in the session after its Q2 report, while it plunged 29% after releasing its Q3 results.

While the social media company continues to see rapid revenue growth and the stock is cheap, it's increasingly looking like a potential value trap.

Soaring revenue, but problems loom

Reddit has been seeing rapid revenue growth, and that continued in Q3, with revenue surging 53% year over year to $895 million. That handily topped the $878 million analyst consensus, as compiled by LSEG.

Ad revenue jumped 54% to $847 million, with other revenue, which includes data licensing, rose 35% to $48 million. U.S ad revenue climbed 51%, while international ad revenue jumped 68%. Growth was led by lower funnel performance revenue, like shopping apps and app installations, while upper funnel video revenue more than doubled.

The company continued to add new users to its platform, but the pace is slowing. Daily users increased 12% to 130.3 million, while weekly users grew by 16% to 515.2 million. However, the daily user number fell short of analyst expectations of 133.7 million users. Meanwhile, more valuable U.S. daily users fell 2% to 50.7 million and missed the 53.5 million analyst consensus.

User growth is one of the big reasons for the collapse in Reddit's stock price and Alphabet's Google search engine is one of the big reasons behind this. CEO Steve Huffman said Alphabet has "shifted in their relationship with the rest of the Internet," as AI Overviews and AI Mode push links down the search page and are driving less traffic to websites. He also believes that Reddit's "machine-translated" content is also being ranked lower." Reddit uses machine learning to translate posts into other languages.

Given this shift, Reddit saw an average decline of 1 million referrals per week in October. It said that if the trend continues, daily active users could drop by low double digits in Q4. In response, the company plans to require all users to create accounts to access its platform moving forward. Currently, around 80% of its revenue comes from logged-in users.

While traffic is becoming an issue, the company has been doing a nice job of monetizing its current user base. Global average revenue per user (ARPU) climbed 36% to $6.87, while U.S. ARPU surged 53% to $13.82. Reddit has been investing in machine learning and automated ad tools that are improving advertising campaigns and boosting ad performance.

Looking at profitability, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared from $166 million a year ago to $402 million. Earnings per share (EPS), meanwhile, surged 75% to $1.40, topping the $1.35 consensus.

Moving forward, the company forecast Q4 revenue to be between $1 billion to $1.03 billion, representing 38% growth. It projected adjusted EBITDA in a range of $480 million to $510 million, compared to adjusted EBITDA of $327 million a year ago.

Image source: The Motley Fool

Should investors buy the dip?

Reddit is doing a great job of growing revenue, users, ARPU, and profits. However, the shifts with Google search present a real potential problem, and the rise of AI agents could only add to that. Google Search acts as Reddit's primary organic customer acquisition, and without it, its ability to bring in new users becomes more difficult over time. Meanwhile, when an AI agent takes content from Reddit, like a product recommendation, the user never visits the site, costing the company potential ad revenue.

RDDT PE Ratio (Forward 1y) data by YCharts

The entire internet landscape is evolving, and what the ultimate impact on web-based companies like Reddit is still largely unknown, but it likely isn't a positive. So while the stock looks extremely cheap with a forward P/E below 9.5 times 2027 analyst estimates given its current growth, it could well turn out to be a value trap.

Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Reddit. The Motley Fool has a disclosure policy.