Reddit Stock Drops 6% as Meta Tests New Forum App

Reddit Inc. (RDDT) shares fell 6 percent on May 22 after Meta Platforms Inc. began testing a standalone app for Facebook Groups called Forum, introducing a significant new competitor to the online discussion space and threatening Reddit’s recent growth momentum.

"This quarter is the seventh straight quarter of top-line growth in excess of 60 percent, a striking feat for a firm with an annual sales run-rate of more than $2.6 billion," Malik Ahmed Khan, a senior equity analyst at Morningstar, said following Reddit's recent earnings. "We attribute this strength to the firm’s bottom-up effort to build an attractive, high-return ad channel."

The competitive pressure from Meta sent Reddit’s stock down 6 percent in trading on May 22, a sharp rebuke to the company’s otherwise stellar first-quarter performance. The recently public company reported revenue of $663.4 million, a 69 percent year-over-year increase that beat consensus estimates by 8 percent, according to Zacks Investment Research. Earnings per share came in at $1.01, crushing the consensus estimate of $0.57.

The launch of Forum by a tech giant like Meta, which has a massive existing user base and vast resources, creates a direct threat to Reddit's market position just months after its initial public offering. The move could impact Reddit's user growth, engagement, and future advertising revenue, which are critical for justifying its valuation to new investors. Zacks' analysis grades Reddit's valuation as a 'D', indicating it trades at a premium.

Strong Quarter Faces a New Challenger

Before the announcement of Meta's Forum app, Reddit was riding a wave of positive financial results. The company's first quarter as a public entity saw revenue grow 69 percent to $663 million and average revenue per user (ARPU) jump 44 percent year-over-year. The user count also expanded by 17 percent over the same period, according to Morningstar. These results had painted a picture of a company with a strong growth trajectory in the digital advertising market.

The new app from Meta, currently in testing on Apple's iOS, aims to provide a dedicated space for online forums, a direct overlap with Reddit's core functionality. The market's reaction suggests investors are concerned that Meta could leverage its billions of Facebook users to quickly scale Forum and siphon users and content creators away from Reddit.

Wall Street's View on Reddit

Analyst sentiment on Reddit has been largely positive, driven by its strong growth metrics. The Zacks Consensus Estimate for Reddit's current fiscal year earnings has been revised upward by 20.2 percent over the last 30 days. The consensus estimate of $4.83 points to an 84.4 percent increase from the prior year. However, the stock holds a Zacks Rank #3 (Hold), suggesting it is expected to perform in line with the broader market in the near term.

Morningstar maintains a fair value estimate of $200 per share for Reddit, viewing the shares as undervalued even after its post-earnings pop. However, the stock has been volatile, returning -10.7 percent over the past month compared to the S&P 500's 4.6 percent gain. Meta's entry into the space adds a new layer of uncertainty for investors, who must now weigh Reddit's impressive growth against a formidable new competitor.

This article is for informational purposes only and does not constitute investment advice.