Reddit Inc. (RDDT): Navigating Volatility at a Crossroads of Growth and Regulation

Reddit Inc. (RDDT) stands at a critical inflection point as it prepares to report its second-quarter 2025 earnings on July 31. The company's stock has been buffeted by conflicting forces: strong user growth, ad revenue momentum, and a forward-looking valuation that hinges on its ability to sustain expansion amid a regulatory crackdown on social media. Investors must now weigh near-term catalysts—such as earnings results and post-call commentary—against long-term risks tied to compliance costs and valuation skepticism.

The Earnings Catalyst: Can Reddit Deliver?

Reddit's Q2 earnings will be a pivotal test of its growth narrative. The consensus estimates call for an EPS of $0.19, a stark rebound from -$0.06 in the same quarter last year. Revenue is expected to grow 61% year-over-year to between $410 million and $430 million, driven by its advertising and community-driven commerce platforms. Yet, the stock's post-earnings performance has been mixed: after Q1 results, shares fell 5.32% despite beating revenue expectations, as investors questioned whether the growth trajectory could offset rising operational expenses.

This time, the market's focus will likely center on two metrics: user engagement and adjusted EBITDA margins. Reddit's Q1 saw 401 million weekly active users (up from 365 million in Q2 . 2024) and 108 million daily active users, but the question remains whether this growth is sustainable. A miss on user retention or a widening net loss could reignite valuation concerns. Meanwhile, the adjusted EBITDA guidance of $110–$130 million will signal whether cost discipline is improving.

Regulatory Overhang: A Growing Headwind for Social Media

While Reddit has not yet faced direct regulatory penalties, the broader social media sector is bracing for sweeping changes. Over 45 U.S. states are advancing 300+ bills in 2025 targeting minors' access to platforms, data privacy, and content algorithms. Key provisions include:

1. Age Verification Mandates: States like Alabama and Oklahoma are banning minors under 16 from social media unless parental consent is verified—a logistical and legal quagmire for platforms.
2. School Device Restrictions: Laws in Florida and Georgia are banning smartphones in K–8 classrooms, potentially limiting user acquisition among younger demographics.
3. Algorithmic Feed Bans: Connecticut's HB 6479 prohibits continuous scroll feeds for minors under 17, a feature central to Reddit's engagement model.

The legal battle over Google's “zero-click” search trends (cited in the Tamraz v. Reddit securities lawsuit) adds another layer of risk. The case alleges that Reddit downplayed Google's impact on its user traffic, but it also underscores a broader vulnerability: if regulators force platforms to disclose more risks or restructure their business models, costs could rise.

Valuation Risks: Is Reddit Overpriced for Its Trajectory?

Reddit's stock trades at a P/E ratio of 47x (based on 2025 estimates), significantly above its peers like Snap (SNAP) or Twitter (TWTR). Analysts argue the valuation hinges on free cash flow generation, which remains elusive. Even if Q2 meets revenue targets, the company's net loss of $33 million in Q1 (despite EBITDA profitability) highlights execution challenges.

Critics also note that Reddit's user growth is heavily reliant on free, ad-supported tiers, leaving it vulnerable to macroeconomic downturns. Should ad spend soften—a risk in an environment of Fed rate uncertainty—the stock could underperform.

Investment Thesis: Proceed with Caution

Reddit presents a compelling story of user growth and community monetization, but its stock is a high-risk bet. Near-term catalysts (earnings, conference call commentary) could provide short-term upside, particularly if user metrics or margins exceed expectations. However, long-term risks—regulatory compliance costs, valuation skepticism, and macro ad volatility—suggest a cautious stance.

Recommendation:
- Bull Case: Buy on dips below $15/share if Q2 results exceed EPS estimates and EBITDA margins expand.
- Bear Case: Avoid unless valuation multiples compress or regulatory clarity emerges.
- Wait-and-See: Hold until post-earnings clarity and monitor developments in state-level regulations.

Reddit's success hinges on its ability to balance growth with profitability while navigating a regulatory minefield. For now, patience—and a watchful eye on July 31—may be the wisest strategy.