Reddit's Mixed Bag: Beating Expectations, But Falling Short on User Growth

Reddit, the popular social media platform, reported its fourth-quarter earnings on February 12, 2025, with a mixed bag of results. While the company topped analysts' estimates for revenue and earnings per share (EPS), it fell short on user growth, sending shares lower in extended trading.



Reddit reported revenue growth of 71% year-over-year to $427.7 million, topping the analyst consensus compiled by Visible Alpha. Net income came in at $71 million, up from $18.5 million a year ago and above expectations. However, Reddit's 101.7 million daily active users (DAUs) in the period fell short of the 103.24 million analysts were looking for, despite growing 39% year-over-year.

Looking ahead, Reddit expects first-quarter revenue of $360 million to $370 million, compared to $243 million a year earlier and above the analyst consensus at the midpoint. Despite the strong financial performance, shares of Reddit plunged 15% to $183.85 in extended trading Wednesday following the release.



Analysts weigh in on Reddit's performance

Several analysts told clients they view the stock's drop as an opportunity to buy the dip. Deutsche Bank analysts, who suggested Reddit's user growth in the fourth quarter was held back by a "transient" shift in Alphabet's (GOOGL) Google Search algorithm, said they believe the "user blip creates an attractive buying opportunity." The analysts maintained a "buy" rating and $235 price target for the stock, implying about 18% upside from Thursday's intraday price.

Morgan Stanley analysts, who raised their target to $210 from $200, told clients to "buy the GOOGL blip dip" as well, pointing to Reddit's "broad-based strength across ad verticals." They also highlighted potential benefits from the rollout of Reddit Answers, an artificial intelligence tool launched in December to a limited number of users. Reddit Answers is designed to answer users’ questions and provide summaries of Reddit threads, and analysts said it could be a "key driver of retention."

JPMorgan analysts, who raised their price target to $185 from $142, told clients Reddit "continues to execute well and capture share" of advertising revenue. The analysts added they see Reddit growing its ad revenue by more than 20% over the next few years.

Reddit's user growth miss overshadows strong financial performance

Despite the strong financial performance, Reddit's user growth miss overshadowed the positive results. The company attributed the miss to a "transient" change in Google's search algorithm, which impacted user growth in the quarter. However, if the user growth does not recover as expected, it could lead to a sustained impact on advertising revenue and market valuation.

In conclusion, Reddit's fourth-quarter earnings report was a mixed bag, with strong financial performance overshadowed by a user growth miss. While analysts view the stock's drop as an opportunity to buy the dip, the user growth miss could have potential long-term implications on Reddit's advertising revenue and market valuation. Investors should monitor the company's future financial performance and user growth trends to assess the actual impact of the user growth miss on Reddit's long-term prospects.