Reddit's Earnings Surge: Can Momentum Outweigh a Premium Price?

In a market where skepticism often outweighs optimism, Reddit Inc. (RDDT) has defied expectations with back-to-back earnings surprises that defy conventional valuation metrics. The social media giant's Q1 2025 results delivered a 550% EPS beat, following a 44% surprise in Q4 2024, fueling a debate over whether its stock—a poster child for growth investing—can sustain its premium valuation. With shares down 28.7% year-to-date despite these wins, investors now face a critical question: Is Reddit's momentum a buying opportunity or a trap in disguise?

The Earnings Engine: Can Surprises Justify the Price?

Reddit's recent streak of beating estimates has been nothing short of extraordinary. In Q1 2025, it reported a diluted EPS of $0.13 against a Zacks consensus of $0.02—a 550% surprise—while Q4 2024's $0.36 EPS topped a $0.25 estimate by 44%. These results reflect a company capitalizing on its 61% year-over-year revenue growth and improving margins, with Adjusted EBITDA jumping to $115.3 million (29.4% of revenue) in Q1. Yet, the stock's underperformance year-to-date suggests investors remain wary of its Forward P/E of 132.08, over four times the internet-software industry average of 28.74.

Zacks Metrics: A Glass Half Full or Half Empty?

Reddit's Zacks Earnings ESP of +35.71% ranks in the top 30% of all companies, signaling strong surprise potential. This metric, which forecasts future beats, is bolstered by upward revisions in analyst estimates ahead of Q1—a trend that suggests confidence in Reddit's execution. However, the Zacks Rank #3 (Hold) tempers optimism, as the algorithm factors in unfavorable earnings estimate revisions and industry dynamics. The contradiction here is instructive: While Reddit's operational metrics scream growth, its stock struggles to translate that into sustained momentum.

Valuation: A High Wire Act

The crux of Reddit's dilemma lies in its PEG ratio of 4.09, which implies investors are paying four times the company's earnings growth rate—a red flag for value investors. While Reddit's 61% revenue growth in Q1 supports its premium, the question remains: Can this pace continue? The company's Q2 guidance calls for $410–$430 million in revenue (a 52–58% YoY rise) and $110–$130 million in Adjusted EBITDA, but execution risks loom. Competitors like PubMatic (PUBM) are struggling, and Reddit's reliance on advertising (which accounts for 91% of revenue) leaves it vulnerable to economic downturns.

July 31 Earnings: The Next Crucible

With the next earnings report due on July 31, investors will scrutinize whether Reddit can replicate its Q1 magic. Analysts expect an EPS of $0.19—a 417% YoY jump—but even a modest miss could amplify concerns about its valuation. Conversely, another surprise could spark a short-covering rally, especially if revenue tops $430 million. However, the bar is set impossibly high: To match its Q1 beat, Reddit would need to exceed consensus estimates by over 400% again, a near-impossible feat.

Historically, a strategy of buying 5 days before quarterly earnings and holding for 10 days since 2020 would have generated a compound annual growth rate (CAGR) of 25.5%, with a total return of 86.4%, though with a maximum drawdown of 31.1%. This underscores the potential rewards and risks tied to Reddit's earnings-driven momentum.

The Bottom Line: Proceed With Caution

Reddit's earnings momentum is undeniable, but its valuation is a barrier to entry. While the Zacks ESP and recent surprises suggest further upside potential, the Zacks Rank #3 and sky-high multiples warn against complacency. For investors, the strategy should hinge on two factors:
1. Entry Points: Consider accumulating shares if the stock dips below $150, closer to its 52-week low, to reduce exposure to overvaluation risk.
2. Catalysts: Monitor July's earnings for signs of margin expansion or diversification beyond ad revenue—both critical to justifying the PEG ratio.

In the near term, Reddit's stock may trade on sentiment, but long-term investors must ask: Can a platform with 108 million daily active users sustain growth at current valuations? Until the P/E ratio compresses or growth slows, Reddit remains a high-risk, high-reward proposition—best suited for those willing to bet on momentum outlasting skepticism. For now, the answer lies in execution, not just expectations.