Reddit Stock: Why It May Finally Be Time to Buy the Dip

Shares of Reddit (NYSE: RDDT) have taken a beating in 2026. As of this writing, the stock has plunged about 39% year to date, dropping to around $140 per share.

But the underlying business looks exceptional. In fact, Reddit's most recent financial results show a business not only growing its top line at a blistering pace but also generating massive cash.

So, with the stock pulling back significantly from its recent highs, should investors step in and buy shares? Or is the stock's premium valuation still too high?

Image source: Getty Images.

A structural shift in profitability

To understand why Reddit's recent results are so impressive, you have to look at how the company is driving its revenue growth.

In Q4, Reddit's revenue surged 70% year over year to $726 million. This actually marked a slight acceleration from the 68% year-over-year revenue growth it posted in the third quarter. And for the full year, revenue rose 69% to $2.2 billion.

Additionally, the company is compounding rapid user growth with even more impressive monetization. While Reddit's daily active users climbed a respectable 19% year over year to 121.4 million in Q4, its advertising revenue skyrocketed 75% to $690 million.

Capturing this impressive monetization, the company's average revenue per user (ARPU) jumped 42% year over year in the fourth quarter to $5.98. Reddit is successfully rolling out artificial intelligence (AI)-powered advertising tools like Reddit Max, and it's using AI to improve the user feed's relevancy.

Even better, Reddit's surging revenue growth is translating to robust profits. Because Reddit's gross margin was 91.9% in the quarter -- marking the sixth consecutive quarter at or above 90% -- a large portion of revenue is flowing to the bottom line. The company reported fourth-quarter net income of $252 million, representing a robust 35% net margin.

And Reddit's cash generation is phenomenal. The company generated $264 million in free cash flow during the quarter, putting its free cash flow margin at a staggering 36% of revenue. This strong cash flow helped the company end the year with nearly $2.5 billion in cash and marketable securities.

Is the price right?

There is no question that Reddit is a fantastic business. But is it a good stock?

Even after a 39% year-to-date haircut, Reddit is not a cheap stock. Trading at a price-to-earnings ratio of about 53, the market is still demanding near-perfection from the company. A valuation multiple like this prices in years of continued double-digit top- and bottom-line growth, which means that investors expect Reddit to maintain its unique positioning on the internet -- even in an era when AI is introducing uncertainty into the competitive landscape for many tech businesses.

If the digital advertising market cools or Reddit's ARPU growth plateaus, the stock could easily face another painful rerating.

But it's not hard to get excited about the bull case. Reddit's unique position as an authentic, human-driven forum makes it incredibly valuable in an era increasingly flooded with generative content.

And with the company recently authorizing a $1 billion share repurchase program, management is clearly signaling confidence in the business's durability.

Ultimately, given the company's incredible momentum in monetizing its fast-growing user base, I think the recent sell-off has finally brought the valuation down to a level that makes sense for long-term investors. The growth stock, however, remains risky given its high valuation. Expectations are undeniably high. But if Reddit can maintain its unique market positioning and keep compounding its ad revenue, I think the company can live up to this valuation, or possibly even exceed it.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Reddit. The Motley Fool has a disclosure policy.