Reddit stock price has imploded: buy the dip or sell the rip?

Reddit stock price has slumped in the past few months, moving from a record high of $281 in September last year to $127 today.

Its market capitalization has dropped from over $50 billion to the current $21 billion. So, will the strong revenue growth help it bounce back?

Reddit stock crashes amid numerous headwinds

The RDDT stock price has staged a strong retreat in the past few months as investors have expressed concerns about its business.

The most recent headwind was a ruling that found social media companies like Meta Platforms and Google liable for negligence in addiction, especially among young people.

This ruling means that social media companies will likely come under more scrutiny in the coming years.

Some investors are concerned that these companies will be viewed in the same lens as tobacco firms.

This explains why Meta Platforms and Snap stock prices have dropped.

Reddit stock has also plunged amid concerns that the business will be disrupted by artificial intelligence technology over time.

However, some analysts believe that the company will benefit from the AI industry because of the vast amount of data in its platform.

At the same time, there were concerns that the company was highly overvalued.

Despite the ongoing crashed, the stock has a forward price-to-earnings ratio of 30, which is much higher than the broader market.

Reddit has key catalysts

Fundamentally, Reddit has one of the best metrics that may help to offset the retreat. The most notable one is that the company’s business continues to grow

Reddit’s daily active unique users rose by 19% in the fourth quarter to over 121.4 million, while the weekly active users rose to 471 million.

The company’s revenue jumped by 70% to over $726 million, while the net income soared by 35% to $252 million.

These numbers make it one of the fastest-growing social media companies in the industry.

Most notably, the company announced a plan to reduce its outstanding shares by buying $1 billion of its own shares.

Share repurchases help to reduce the outstanding shares, which, in theory, leads to a higher earnings per share (EPS).

Wall Street analysts believe that the company has more room to grow. The average estimate is that its quarterly revenue will be $606 million, up by 54% YoY.

This revenue growth will continue in the next few quarters, with the average estimate for the year rising to $3.14 billion, up by 42% YoY. Its revenue will be $4.09 billion, up by 30% YoY.

Reddit has also become highly profitable, with the earnings-per-share (EPS l) rising to $4.12, up from $2.52 last year. Its EPS will then grow to $5.75.

Therefore, with Reddit, we have a quality social media company whose revenue and profits are growing. As such, while its technicals are weak, the stock will likely rebound over time.

RDDT stock chart | Source: TradingView

The daily timeframe chart shows that the RDDT stock price has crashed in the past few months, moving from a high of $282 in September last year to the current $127.

It has dropped below the 61.8% Fibonacci Retracement level at $158.

The stock moved below the important support level at $127.9, its lowest level in February.

The stock has dropped below all moving averages, a sign that bears remain in control. It has also dropped below the Ichimoku cloud and Supertrend indicators.

Therefore, the stock will likely continue falling, with the next key target to watch being the psychological level at $100.

In the long-term, however, the stock will likely rebound as investors buy the dip.