Reddit's Plunge: Navigating the Perfect Storm of Earnings, Costs, and Competition

Reddit’s stock (ticker: RDD) plummeted sharply on May 1, 2025, falling to $112.84—a 7.7% drop from the prior day—amid investor anxiety over its Q1 2025 earnings report and broader market turbulence. But this decline wasn’t random; it was the culmination of a perfect storm of operational missteps, macroeconomic headwinds, and intensifying competition. Let’s dissect the forces behind Reddit’s stock unraveling.

The Earnings Report That Fueled Fears

Reddit’s earnings release on May 1 disappointed investors, even before the numbers were officially announced. Analysts had already flagged concerns about its ability to meet free cash flow targets, with the consensus expecting at least $1.75 per share for Q1 2025 to avoid a downgrade. But the company’s operational inefficiencies and rising costs—operational expenses surged 108% year-over-year in 2024—raised red flags.

Even more alarming was the EPS (earnings per share) outlook. While revenue grew 53% year-over-year to $372 million (matching expectations), profitability cratered. The $0.03 EPS marked a 90% decline from the prior year’s $0.15, signaling a disconnect between top-line growth and bottom-line execution. Investors, already wary of Reddit’s valuation, interpreted this as a warning sign of systemic inefficiencies.

Operational Costs: A Growing Headache

Reddit’s cost structure has long been a thorn in its side. In 2024, expenses outpaced revenue growth by nearly double (62% vs. 108%), even as its contribution margin—a measure of profitability—remained healthy at 86–90%. The problem? Fixed costs like stock-based compensation (SBC) and infrastructure investments are eating into profits.

Analysts noted that SBC costs in Q1 2025 likely surged due to Reddit’s volatile stock price, compounding the pressure to cut costs. This dynamic has left the company in a precarious position: it’s no longer a startup but still struggling to achieve the economies of scale needed to sustain its growth narrative.

Macroeconomic Headwinds and Sector Sell-Offs

The broader tech sector faced a reckoning in early 2025, exacerbated by President Trump’s tariffs and fears of a recession. The U.S. GDP contracted by 0.3% in Q1 2025, the first decline in three years, spooking investors.

Tech stocks, which rely heavily on discretionary spending and advertising revenue, bore the brunt. Reddit, which derives over 90% of its revenue from ads, was particularly vulnerable. Competitors like Snap Inc. (SNAP) had already signaled caution, with Snap’s CFO citing “macroeconomic uncertainty” for its lack of Q2 guidance—a move that dragged down peer platforms.

Competitive Pressures and Valuation Concerns

Reddit’s valuation looked increasingly disconnected from reality. Trading at 11.26x forward price/sales—nearly double the industry average—investors began questioning whether the stock’s premium was justified. Meanwhile, peers like Snap were nibbling at Reddit’s ad market share with tools like its Snap Pixel conversion tracker, which offers advertisers more granular targeting.

The numbers told the story: Reddit’s stock had dropped 25.7% YTD in 2025, far worse than Snap (-18%) or the broader internet sector (-5.8%). Analysts at Zacks downgraded the stock to a “Strong Sell” (rank #5), citing a lack of user growth momentum (DAUq of 101.7 million missed estimates) and overreliance on ads in a weakening economy.

The Bottom Line: A Risky Gamble?

Reddit’s May 1 decline wasn’t just about one bad quarter—it was a verdict on its ability to deliver on promises. Here’s the math:

• EPS cratered, missing expectations by 90% year-over-year.
• Free cash flow lagged, with 2024’s $1.48 per share falling short of investor demands.
• Valuation stretched, trading at 67–81x free cash flow versus peers.
• Macroeconomic risks amplified by a contracting GDP and sector-wide skepticism.

The data paints a clear picture: Reddit is stuck between the costly demands of scaling and a fragile ad-driven business model. Until it can curb expenses, diversify revenue, or demonstrate user growth, its stock will remain under siege. For now, the “Reddit gamble” looks like a risky bet in a cautious market.

In short, Reddit’s plunge is a wake-up call: growth alone isn’t enough when profitability falters, costs soar, and the economy turns. Investors may need more than AI chatbots and international expansion to justify this stock’s price—especially when the competition is closing in.