Can Improving User Engagement Push the Reddit Stock Higher?

Core Insights - Reddit (RDDT) is a community-driven platform focused on real-time discussions across over 100,000 active communities, with advertising as its primary revenue source [1] - The platform's growth is dependent on expanding and retaining a highly engaged user base, which is attractive to marketers seeking high-conversion platforms [1] User Engagement and Revenue - Reddit's Daily Active Uniques (DAUq) and Weekly Active Uniques (WAUq) increased by 31% year over year in Q1, reaching 108.1 million and 401 million, respectively [2] - Average revenue per user (ARPU) rose 23% year over year to $3.63 in the reported quarter, with a Zacks Consensus estimate of $3.85 for Q2 [2][9] - The core ad business grew 61% year over year to $358.6 million in Q1, with a Zacks Consensus estimate of $394.2 million for Q2 [4] Platform Enhancements - A series of platform enhancements, including AI-powered feed ranking and Community Intelligence tools, are expected to improve user engagement and ad targeting [3] - Features like Reddit Answers and guided contribution flows are designed to promote active participation and retention [3] Competitive Landscape - Reddit faces significant competition from Meta Platforms and Nextdoor in scaling ad revenues through user engagement [5] - Meta Platforms leverages its AI-powered ad delivery and extensive user base to drive high ARPU and retention [5] - Nextdoor is enhancing its localized performance ad model, which aligns with Reddit's strategy of converting engagement into monetizable intent [6] Stock Performance and Valuation - Reddit shares have declined 10.9% year to date, contrasting with increases in the broader Zacks Computer & Technology sector and the Internet Software industry [7] - Reddit's stock is trading at a premium, with a forward 12-month Price/Sales ratio of 12.62X compared to the industry's 5.72X [11] - The Zacks Consensus Estimate for Reddit's 2025 earnings is $1.21 per share, an improvement from a loss of $3.33 per share in 2024 [14]