Trump's Tariffs Offer Investment Opportunity: Seize Stocks at Reduced Prices
In a world where it seems like President Donald Trump is locked in constant battle – investors might as well think he's fighting the stock market too.
Swings in threats to impose 25% tariffs on imports from Mexico, Canada, and China, alongside on-going imposition of tariffs on China, have raised fears that the economy could be pushed into a recession. With memories of past recessions, where the average drop in the stock market hovers around 40%, investors have started bailing out – making a hasty exit before things get worse.
Since reaching an all-time high of 20,173.89 on Dec. 16, the Nasdaq Composite has fallen a staggering 12% in just three months. However, among the casualties, there's one unstoppable stock that's currently trading at a whopping 50% discount.
Why is Reddit stock down 38% in one month?
Reddit (6.48%), with its social media focus, is no stranger, having gone public just a year ago in a popular March 2024 Initial Public Offering (IPO). Following the IPO, the stock more than doubled in price, but now stands at a 38% price drop over the past few weeks.
Before we delve into why the stock started plummeting even before the Nasdaq took a nosedive due to Trump's tariffs, let's review its Q4 2024 earnings. Reported on Feb. 12, the numbers showed:
- An increase in daily and weekly users by 39% and 42% respectively.
- A surge in revenue by 71% year over year, reaching $427.7 million.
- A positive free cash flow of $89 million.
- Earnings of $0.36 per share, outperforming expectations.
However, the company forecast only a 50% sales growth in Q1 2025 and hinted at a potential slowdown in revenue growth for the latter half of the year, after a recent change in Google's search engine ranking algorithm (Called a non-issue for Reddit, as tariffs per se). Expectations for full-year revenue growth are around 39%.
reddit inquiry: How does Reddit increase revenue?
To counteract this, Reddit is already implementing changes. Last week, they announced new tools to make posting on Reddit easier and to help users understand what works on their posts, potentially increasing traffic on the site. Additionally, Reddit is improving advertising tools, with plans to allow more advertising on comments pages and the possibility of offering search advertising – attracting more advertisers and boosting Average Revenue Per User (ARPU) and overall revenue.
Given the digital nature of Reddit's business, largely dependent on electronic data, the hullabaloo about the Trump tariffs seems fairly insignificant, with potentialuese impacts coming from Europe's possible increase in taxes on foreign tech businesses or foreign regulation of internet speech.
Is Reddit stock a buy at $130 a share?
Despite forecasting slower revenue growth this year than other analysts (36%), Loop Capital believes Reddit stock is a buy at $210 a share – a 61% premium over the current share price of $130. It's hard to disagree, considering:
- Reddit's current valuation of $23 billion (or $20.4 billion net of cash) translates to 94 times its trailing free cash flow (FCF) of $216 million. A steep price, even if growth sticks to a conservative 36%. However, Loop Capital predicts Reddit's EBITDA will grow faster than revenue at 87% this year and FCF will expand even more quickly – up by 142%, according to most analysts.
- If this forecast holds true, it would mean Reddit is growing FCF four times faster than sales, with a FCF/share of $14.28, making it even more of a bargain than it appears.
In this tumultuous market, Reddit stock presents a unique opportunity to invest in an unstoppable company at a compelling discount.
- Tariffs imposed by President Donald Trump on imports from various countries have raised concerns that the economy might slip into a recession, prompting investors to panic and sell off their stocks, including the Nasdaq Composite.
- Despite the overall market decline, there's one stock that's defying the trend – Reddit, which is currently trading at a 50% discount, even though it's fallen 38% over the past month.
- Although Reddit's Q4 2024 earnings showed positive growth in key areas like users, revenue, and free cash flow, the company forecasted only a 50% sales growth in Q1 2025 and hinted at a potential slowdown in revenue growth for the latter half of the year.
- Despite the forecasted slower revenue growth and a current share price of $130, analysts like Loop Capital see Reddit stock as a buy, offering a 61% premium over the current share price, given the company's potential for faster EBITDA and FCF growth in 2025.