Is Reddit Stock a Buy After Dropping Over 50% From Its 52-Week High?

Company Overview - Reddit's stock experienced a significant decline of 56% from its 52-week high of $230.41, primarily due to macroeconomic uncertainties and concerns from analysts regarding its growth sustainability [1][2] Business Performance - In Q1, Reddit achieved a 31% year-over-year growth in daily active unique users (DAUq), reaching 108.1 million [4] - The company reported sales of $392.4 million in Q1, marking a remarkable 61% increase compared to the previous year, and continued revenue momentum with 2024 sales rising 62% year-over-year to $1.3 billion [5] - Reddit's Q1 gross margin was exceptionally high at 90.5%, significantly outperforming Alphabet's gross margin of 60% [6] - The company generated a net income of $26.2 million and free cash flow of $126.6 million in Q1, providing resources for future growth [6] Growth Strategy - Reddit is focusing on international expansion to increase DAUq, utilizing AI to translate content into other languages, which led to an 80% DAUq growth in Brazil during Q1 [7][8] - The company is also testing dynamic product ads (DPA) to capitalize on user interest in product recommendations [8] Challenges - Reddit's reliance on search engines like Google for traffic poses a risk, as changes in Google's algorithms can impact visitor numbers [9] - The rise of AI presents a competitive challenge, although Reddit's CEO believes that users still prefer authentic opinions from real people [10] Financial Outlook - For Q2, Reddit estimates revenue between $410 million and $430 million, a substantial increase from the previous year's $281.2 million [11] - The company has a strong balance sheet, with total assets of $2.4 billion and liabilities of $219.9 million, along with $1.9 billion in cash and short-term investments [11] Investment Consideration - Reddit's forward price-to-earnings (P/E) ratio has decreased significantly, making the stock more reasonably priced compared to previous months [12][14] - The company's return on equity (ROE) has improved over the past year, reaching positive territory in 2025, indicating effective profit generation from invested capital [14][16] - Given its strong financials and growth potential, Reddit is viewed as a solid long-term investment opportunity [16]