Meet the Newest Stock in the S&P 500. It Soared 424% Since Its 2024 IPO, and It’s a Buy Right Now, According to Wall Street
The S&P 500 (^GSPC -0.22%) is the most widely recognized stock market index in the U.S., and consists of the 500 largest companies in the country. Due to the significant reach of its component companies, it is considered by many to be the most reliable measure of overall stock market performance. To be included in the S&P 500, a company must meet the following prerequisites:
- Be based in the U.S.
- Have a market cap of at least $22.7 billion
- Be highly liquid
- A minimum of 50% of its outstanding shares must be available for trading
- Must be profitable on a GAAP basis in its most recent quarter
- In aggregate, must be profitable over the preceding four quarters
Reddit (RDDT -4.75%) is poised to become the newest addition to the S&P 500, scheduled to join the benchmark on Tuesday, Aug. 18, replacing AvalonBay Communities. The social media platform was founded two decades ago, but only went public two years ago. Since its IPO in mid-2024, Reddit stock has soared 424% (as I write this). The company is known for its massive collection of user-powered forums.
Despite its impressive gains, many on Wall Street believe there’s a long runway of growth ahead. Let’s look at the keys to Reddit’s success and what the future holds.
Image source: The Motley Fool.
Carving out a unique path
Reddit is unique among social media platforms in that it is made up of a multitude of communities (subreddits) that cover a vast array of topics, news, content, hobbies, and every imaginable niche interest.
The platform is democratic, as users upvote or downvote posts or answers to questions based on their usefulness, accuracy, and how directly they address the topic. For example, posts that are off-topic, break rules, or contain spam are often downvoted.
Moreover, each community has its own culture and set of rules that members must abide by. Many users turn to Reddit for a unique human perspective, particularly at a time when content is increasingly curated by artificial intelligence (AI).
The company’s financial results supported its entry into the S&P 500. For the second quarter, Reddit generated revenue that grew 61% year over year to $805 million, marking its eighth consecutive quarter of growth above 60%. The company’s profitability more than doubled, supported by its expanding margins, as diluted earnings per share (EPS) surged 178% to $1.25.
Management also offered a robust forecast. For the third quarter, Reddit is guiding for year-over-year revenue growth of 48% to $865 million at the midpoint of its guidance. This would result in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $390 million, an increase of 65%.
The company’s operational metrics support management’s bullish outlook. In Q2, daily active unique users grew 18% to 130.3 million, while weekly active unique users grew 24% to 514.6 million. Management noted that advertising was Reddit’s key growth driver, with revenue up 64% year over year to $762 million, driven by higher pricing and increasing ad impressions.
Today’s Change
(-4.75%) $-8.45
Current Price
$169.64
Key Data Points
Market Cap
Day’s Range
$168.76 – $178.34
52wk Range
$119.27 – $282.95
Volume
5.3M
Avg Vol
5.4M
Gross Margin
90.85%
Analysts are still bullish on Reddit
The diversity of Wall Street’s opinions is the stuff of legend, so it’s noteworthy that the majority of analysts who cover Reddit believe there’s still upside ahead. Of the 33 analysts who offered an opinion in August, 21 maintain a buy or strong buy rating, and none recommend selling. Furthermore, an average price target of roughly $215 represents potential upside of 21% compared to Friday’s closing price.
However, Needham analyst Laura Martin is much more bullish than her Wall Street colleagues, maintaining a buy rating and a price target of $300. That suggests potential gains for investors of 68% compared to Thursday’s closing price. The analyst cites Reddit’s “100% human-created content” as providing a “deep moat” in the age of AI. Martin also highlights the company’s “execution excellence” after eight successive quarters of 60%+ growth.
At 40 times earnings, Reddit might be a bit pricey for value-conscious investors. However, its forward-looking valuation is much more reasonable, at 23 times forward earnings and 18 times next year’s expected earnings. However, Reddit has outperformed the broader market by a wide margin since its debut, generating gains of 424%, roughly nine times the 48% return of the S&P 500.
This illustrates why Reddit is deserving of a premium and why the stock is a buy.
