RDDT Shares Drop 39% Over the Last Three Months: Is It Time to Keep or Sell?

Reddit (RDDT) Shares Experience Significant Decline

Over the past quarter, Reddit’s stock (RDDT) has fallen by 39.1%, a much steeper drop compared to the broader Zacks Computer & Technology sector, which declined 4.8%. The Internet - Software industry also saw a 12% decrease during this period. This notable underperformance is largely due to a tough economic climate, including higher tariffs that could limit discretionary advertising budgets, as well as ongoing intense competition in the sector.

Recent Stock Performance Overview

Despite these challenges, Reddit has seen impressive growth in user engagement. The platform has reported increases in both daily and weekly active users, improvements in Average Revenue Per User (ARPU), and the rollout of advanced advertising solutions like Dynamic Product Ads (DPA), Reddit Pixel, and CAPI. In the fourth quarter of 2025, ARPU surged 42% year-over-year to $5.98, reflecting successful portfolio expansion and enhanced monetization. Investments in AI-driven tools have also contributed to higher user interaction and advertising income. During the same quarter, Reddit reached 121 million daily active users (up 19% year-over-year) and 471 million weekly active users (a 24% increase).

Growth Driven by Portfolio Expansion

Reddit’s broadening suite of advertising products has played a pivotal role in its recent success. In Q4 2025, advertising revenue soared 75% year-over-year, reaching $690 million. The introduction of innovative ad formats, such as DPA and Reddit Max campaigns, has attracted more advertisers and improved return on ad spend (ROAS). DPA, in particular, performed exceptionally well during major shopping events like Black Friday and Cyber Monday. Enhanced machine learning models for DPA led to a 75% increase in advertiser ROAS in Q4 2025, strengthening Reddit’s position in the shopping ads market.

AI-powered features have also fueled growth, especially through search-led engagement. The launch of Reddit Answers, which leverages community insights to improve search, has been a standout. Weekly search activity on Reddit climbed to over 80 million users in Q4 2025, up from 60 million the previous year. Queries through Reddit Answers grew from 1 million to 15 million over the same period.

Upward Trend in Earnings Projections

Reddit’s expanding product lineup and increasing user engagement are expected to drive continued revenue growth. For the first quarter of 2026, Reddit anticipates revenue between $595 million and $605 million. The Zacks Consensus Estimate is slightly higher at $614.09 million, representing a 56.51% year-over-year increase. Earnings per share for the quarter are projected at 62 cents, a 12.72% rise over the past month and a remarkable 376.92% increase compared to the previous year.

Reddit Inc. Price and Consensus

Competitive Pressures Remain High

Despite its growth, Reddit faces strong competition from companies like Snap (SNAP), Meta Platforms (META), and Pinterest (PINS). Snap has seen robust revenue gains, fueled by higher advertising demand and new direct revenue streams. In Q4, Snap’s active advertiser count increased 28% year-over-year, thanks to easier onboarding, improved campaign management, and better performance.

Meta Platforms continues to integrate AI across its suite of apps—including Facebook, WhatsApp, Instagram, Messenger, and Threads—driving user engagement and advertising revenue. In Q4 2025, Meta’s advertising revenue rose 24.3% year-over-year to $58.14 billion, making up 97.1% of its total revenue. On a constant currency basis, revenue grew 23%.

Pinterest is also expanding rapidly, with over 80 billion monthly searches and growing user engagement. The adoption of AI-powered advertising tools and strong demand from mid-market, SMB, international advertisers, and key sectors like retail and finance are boosting Pinterest’s revenue.

Valuation: Reddit Shares Appear Overpriced

Currently, Reddit’s stock is considered overvalued, as indicated by its Value Score of D. The company’s forward 12-month Price/Sales ratio stands at 8.25, which is higher than the Zacks Computer & Technology sector average of 6.20.

Reddit’s Valuation Snapshot

Summary and Outlook

Reddit’s future is supported by its growing advertising business, expanding customer base, and enhanced user experience through improved search and discovery features. However, the company still faces headwinds from a challenging economic environment, including higher tariffs that could dampen ad spending, as well as a stretched valuation and fierce competition.

Reddit currently holds a Zacks Rank #3 (Hold), suggesting that investors may want to wait for a more attractive entry point.