Can Reddit's AI Innovations and Ad Growth Push the Stock Higher?

Reddit RDDT shares have appreciated 25.7% in the past month compared with the broader Zacks Computer & Technology sector’s rise of 4%.RDDT shares have also outperformed the Zacks Internet Software industry and its peers, including Snap SNAP and Meta Platforms META, in the past month. While Snap and Meta Platforms shares have gained 8% and 9.1% in the past month, respectively, the industry returned 10%.The outperformance can be attributed to Reddit’s extensive content to enhance search and AI capabilities. Aggressive investment on content and AI innovations has improved Reddit’s competitive prowess, and has been a key catalyst in maintaining user engagement and attracting new users.YTD PerformanceImage Source: Zacks Investment ResearchAI-Powered Reddit Answers to Boost User EngagementRDDT is set to introduce its new AI-powered chatbot, Reddit Answers, designed to enhance user search experience and engagement. Currently, in the testing phase, this feature will provide users with AI-curated summaries of relevant discussions from real conversations across the platform, offering information, recommendations, and discussions. Reddit Answers aims to streamline the search process by presenting inline snippets and answers and allowing users to explore further through follow-up questions. Initially available to a select group of U.S. users in English, the feature will be accessible on the web and iOS, with plans to expand to other languages and regions in the future. Powered by AI models from Reddit, Alphabet GOOGL, and OpenAI, this new tool follows Reddit’s earlier collaboration with OpenAI to make its content available on ChatGPT.Expanding Clientele Aids RDDT’s ProspectsReddit’s expanding partner base strengthens its competitive prowess. Its partnership with Alphabet boosts content discovery and community engagement by providing access to Reddit’s Data API. This enhances Google’s products and supports AI advancements, benefiting both companies.RDDT’s partnership with Integral Ad Science (IAS) boosts advertisers’ confidence in scaling its campaigns on Reddit through the latter’s AI-driven Total Media Quality product suite. Collaborating with IAS will provide trusted, third-party transparency and advanced measurement tools, safeguarding brand safety while maximizing campaign engagement across Reddit’s extensive communities.RDDT Benefits From Surge in Ad Growth and User EngagementReddit’s continued focus on diversifying its advertising solutions and enhancing ad efficiency has also emerged as a critical growth driver for its business. The advertising business grew 56% year over year to $315.1 million in the third quarter of 2024, driven by higher impressions, more efficient ad placements and expanded conversation placement ads.The increase in ad impressions and the expansion of conversation placement ads helped drive engagement, as evidenced by a 40% year-over-year increase in conversation pageviews in the third quarter.Further solidifying its advertising capabilities, Reddit enhanced its ad products in the third quarter, including conversation ads and tools like auto bidding and CAPI (Conversions API), which drove higher conversion rates. The ad business also benefited from strong performance in various sectors, including auto, consumer goods, and pharmaceuticals.The improvements in ad performance also had a profound effect on Reddit’s user base. Daily active users (DAUs) surged 47% year over year, reaching over 97 million DAUs and surpassing the milestone of 100 million DAUs for the first time during the third quarter, reflecting the platform’s growing popularity.RDDT Earnings Estimates Show Upward MovementFor the fourth quarter of 2024, RDDT expects revenues between $385 million and $400 million, which indicates growth of 54%-60% (57% at the mid-point) driven by the aforesaid factors.For the fourth quarter, the Zacks Consensus Estimate for revenues is pegged at $404.97 million.The Zacks Consensus Estimate for fourth-quarter 2024 earnings is pegged at 23 cents per share, which has increased 21% in the past 30 days.Reddit Inc. Price and Consensus Reddit Inc. price-consensus-chart | Reddit Inc. QuoteFind the latest EPS estimates and surprises on Zacks Earnings Calendar.What Should Investors Do With RDDT Stock?We point out that RDDT stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.In terms of the trailing 12-month Price/Book ratio, RDDT is trading at 14.73X, higher than its median of 12.53X and the broader Zacks Computer & Technology sector’s 10.55X.Price/Book Ratio (TTM)Image Source: Zacks Investment ResearchHowever, we believe RDDT’s strong user growth, enhanced ad product offerings and expanding partner base will continue to drive top-line growth and enhance its growth prospects. This is why we believe the premium valuation is justified.RRDT stock currently carries a Zacks Rank #2 (Buy) and has a Growth Score of B, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. 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