Some quarterly results released last night disappointed, such as those from Microsoft (NASDAQ:MSFT) and Meta (NASDAQ:META). However, those of Reddit Inc (NYSE:RDDT) left investors euphoric, with the stock climbing 42% to close at a record high of $116.03 per share on Wednesday.
The company reported a surprise net income of $29.9 million, while consensus had expected a loss of $8.8 million. This is the third profitable quarter for the company.
Reddit's revenue jumped 68% from a year earlier to $348.4 million.
Note that this performance is largely due to its licensing agreements with OpenAI and Google (NASDAQ:GOOGL), which are reflected in the $33.2 million of "other income" reported by the company for the third quarter.
AI licensing deals, which allow AI developers to use Reddit data to train their models, are a revenue category that grew 547% year over year and now account for more than 9% of the company's overall revenue, up from less than 1% last year.
On that note, CEO Steve Huffman previously said that Reddit is well positioned in the middle of an intense “arms race” for AI training.
However, after yesterday's impressive rally, the stock now appears significantly overvalued, with the average analyst target of $103.41 now nearly 11% below the current price.
Meanwhile, Reddit's InvestingPro Fair Value, which synthesizes several recognized financial models, is at $87.96, which translates into a downside potential of more than 24%.
So buying Reddit stock after its bullish burst yesterday would probably be a timing mistake.
However, if you are looking for opportunities in the technology sector, be aware that ProPicks AI’s Tech Titans strategy will be re-evaluated this week, with a new list of stocks to buy and sell for the month of November.
The strategy has returned nearly 2,000% since its backtest began in January 2013, and has outperformed the S&P 500 by more than 40% in real-world terms over the past 12 months.