Reddit's AI-Driven Renaissance: Underperformance Masks Long-Term Potential

The social media sector has faced a turbulent 2025, with many platforms grappling with declining user engagement and rising competition. Yet within this landscape, Reddit (RDDT) stands out—a company whose strategic AI investments and underperformance relative to peers mask a compelling growth narrative. Despite trading at a 18.1% year-to-date (YTD) discount to its sector, Reddit's fundamentals, user growth, and AI-powered innovations position it as a prime candidate for a long-term "Buy" recommendation.

The Contradiction of Underperformance and Outperformance

While Reddit's stock has declined 18.1% YTD—a steeper drop than the broader tech sector's 1.2%—it has outperformed direct rivals Snap (SNAP, -24%) and Nextdoor (KIND, -31.6%). This divergence reflects a market that discounts Reddit's near-term risks while undervaluing its long-term potential.

Key Financial Metrics
- Revenue Growth: Reddit's Q1 2025 revenue surged 61% year-over-year to $392.36M, exceeding analyst estimates by 5.4%. Guidance for Q2 2025 projects a further 51.6% growth, reaching $410–430M.
- User Expansion: Daily active users (DAUs) rose 31% to 108.1M, with weekly active users growing at the same rate. This scale underpins its advertising dominance, as ad revenue hit $358.6M (+61% YoY).
- Profitability: Net losses narrowed significantly, with Q1 2025 net income at $26.2M versus a $575M loss in the prior year. Adjusted EBITDA improved to $115.3M, signaling operational efficiency.

AI: The Catalyst for Sustainable Growth

Reddit's AI initiatives are its most compelling differentiator. The platform's 2025 pivot toward AI-driven content curation and advertising tools has created two critical growth levers:

1. Data Licensing and Partnerships
   Reddit's trove of user-generated content (UGC) is a goldmine for AI training. A $60M annual deal with Google (Alphabet) leverages this data to improve search algorithms, driving visibility and user growth. Further, Reddit's "Answers" feature—AI-generated summaries of complex discussions—enhances engagement and ad targeting.

2. Monetization Beyond Ads
   New AI-powered tools, such as personalized ad recommendations and paid subreddits, aim to diversify revenue. International expansion into 35 countries by 2025 will further amplify this potential. A valuation model projecting 200M users at $7.16/user revenue implies $5.1B in annual net profit—a $100B valuation target (P/E ~19.6) that rivals Meta's growth trajectory.

Analyst Consensus: Buy with Caution

Despite Zacks' Hold rating (#3), 13 of 22 analysts rate Reddit a "Buy" or "Strong Buy," with a median price target of $180—a 3.7% upside from its current $173.30. Key upgrades include:
- Citi: Raised target to $163, citing "short-term upside."
- Deutsche Bank: Boosted target to $180, emphasizing long-term fundamentals.
- Seaport Global: Upgraded from Neutral to Buy at $165, calling Reddit "undervalued."

Risks to Consider

• Valuation Concerns: Reddit trades at an 11.8x P/S ratio—double the sector average—raising questions about overvaluation.
• Dependency Risks: 90% of revenue comes from ads, and Google's algorithm changes could disrupt traffic.
• Regulatory Scrutiny: Data licensing deals face potential antitrust challenges.

Investment Thesis

Reddit's stock is a high-risk, high-reward bet. While near-term volatility and valuation fears may deter short-term traders, the company's AI-driven moat, user growth, and partnerships with tech giants like Microsoft and Alphabet make it a compelling long-term play.

Conclusion

Reddit's underperformance relative to its sector is temporary. Its AI investments, user base expansion, and revenue diversification strategies align with a future where data and engagement drive value. For investors with a 3–5 year horizon, Reddit's fundamentals justify a "Buy" recommendation—despite near-term headwinds. As the Motley Fool noted, replicating Meta's 700% decade-long growth could deliver a 600% return for those willing to endure the turbulence.

Final Recommendation: Buy Reddit (RDDT) for long-term portfolios. Monitor for quarterly revenue beats and regulatory clarity.
Price Target: $180 by end-2025 (median consensus).

Data as of June 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.