Image Source: Pixabay

One of the first social media sites, Reddit (NYSE: RDDT), has been around for 20 years since it debuted in 2005, but it never went public until last March.

Since then, Reddit stock has been on an incredible run. Since it IPO’ed at $34 per share in March of 2024, it has risen 567% to its current price of around $227 per share. Over the past 12 months it has returned roughly 336% and year-to-date it is up 40%.

Since the company released its second quarter earnings on July 31, Reddit stock has surged 42% including a 3% gain on Tuesday. As of 12:00 p.m. ET on August 12, Reddit was poised to establish a new all-time closing high.

After such a sharp rise, can investors reasonably expect it to go higher?

A 78% revenue increase

The catalyst for the recent surge in price has clearly been the strong second quarter earnings report and subsequent price target upgrades among a slew of Wall Street analysts.

Reddit had one of its best quarters as a public company, with revenue surging 78% in Q2 to $500 million, which crushed estimates of $426 million. Revenue was driven by a 21% increase in daily active unique users to 110.4 million.

The company also reported net income of $89 million, which was up from a $10 million net loss in the same quarter a year ago. Earnings were 45 cents per share, which topped estimates of 190 cents per share.

Also, Reddit posted a gaudy 90.8% gross margin, up from 89.5%, which means it makes almost 91% profit on every dollar of sales after expenses. That helped boost its free cash flow by $84 million to $111 million, which will give it more cash to invest and grow.

Even more encouraging than the results was the outlook, which was better than analysts expected. The company anticipates revenue in the range of $535 million to $545 million, which would be up 7% to 9% over Q2. That tops estimates of $473 million. Adjusted EBITDA is targeted for $185 million to $195 million, up 11% to 17% from Q2 and beyond estimates of $160 million.

Massive analyst upgrades

Wall Street analysts were impressed by the earnings report, as some 13 different analysts’ boosted their price targets for Reddit stock. Among the largest raises were Truist, which increased its target by $65 to $225 per share. Morgan Stanley increased its target by $60 per share to $230 per share while Raymond James boosted it by $50 to $225 per share. The highest price target came from B. Riley, which lifted its outlook by $15 to $235 per share.

The thing is, investor enthusiasm has blasted the price past almost all of these targets in the past two weeks. It has gotten to the point where the stock is trading at a ridiculously high multiple of 98 times earnings and 120 times forward earnings.

There is so much to like about Reddit, which is why the stock is taking off. As CEO Steve Huffman said, “Reddit is built for this moment. In a world where connection is increasingly rare, our communities show how valuable human conversation and knowledge really are.”

But after such a huge run up, investors should be wary of the valuation. Reddit is a great long term stock that’s worth owning, just look for the right opportunity to get in.

More By This Author:

How Rate Cuts Could Impact Stock Market Returns
In Shifting Energy Landscape, Solar Stocks Are Hot - Here’s Why
Apple Bounces 10% After Committing $600b To U.S. Manufacturing