Is Reddit Stock Too Hot, or Just Right?

After spending much of the spring under significant selling pressure, shares of Reddit Inc. (NYSE: RDDT) have been roaring back in some style. The stock has climbed more than 50% in just over two weeks, breaking free of its prior trading range and cruising into all-time highs.

It's a remarkable reversal for a stock that only went public last year. It then promptly collapsed 65% between February and April, leading to many on Wall Street dismissing it as just another over-hyped IPO.

The spark for this resurgence came on the last day of July, when Reddit posted a blistering Q2 earnings report that crushed expectations across the board. Since then, the rally has been one-way traffic, with the stock posting gain after gain and leaving short sellers scrambling for cover.

For the bulls, it's vindication; for the bears, it's become a nightmare. 

The RSI Warning Light

Still, even the most optimistic traders know that no rally goes straight up forever. One technical reading that's hard to ignore right now is the popular Relative Strength Index (RSI). The RSI measures the speed and magnitude of recent price moves on a scale of 0 to 100, helping traders gauge whether a stock is overbought or oversold.

Readings above 70 typically signal overbought conditions. Above 80, they're considered extremely overbought and in the kind of territory that often precedes a pullback.

As of Thursday's close, Reddit's RSI was a scorching 87. That number alone doesn't mean the stock is about to reverse, but it does raise the probability that a period of consolidation or profit-taking is near.

Thursday's 3.7% gain pushed the RSI even higher, underscoring just how overheated the stock has become. For seasoned traders, this is a yellow flag, if not one that's starting to show shades of red. It's not exactly a reason to sell and walk away, but at the very least, it's a signal to watch the stock closely for signs of fatigue.

Fundamentals Are on Fire

The temptation to look past technical caution flags is understandable given the strength of Reddit's fundamentals. The recent report showed revenue surging 77% year-over-year, coming in well ahead of consensus expectations, while EPS landed 136% higher than analysts had forecast.

There were plenty of more bright spots, like gross margin expanding to almost 91% and free cash flow jumping to $111 million from just $28 million in the same quarter last year. For a platform still proving its monetization model to Wall Street, these numbers signal that it's finding multiple levers for growth and profitability.

It's the kind of report that forces even skeptics to reassess their stance. And it makes the 65% drawdown from earlier this year look, in hindsight, like one of the more glaring mispricings of 2025.

Analysts Take Sides

Adding fuel to the fire is the fact that the earnings beat prompted a fresh wave of bullish analyst commentary on Reddit's prospects. The teams over at Wolfe Research, Raymond James, and Guggenheim have all issued Buy or equivalent ratings in recent weeks, highlighting Reddit's accelerating revenue growth and rising user engagement.

But that being said, not everyone is chasing the stock higher. Both Goldman Sachs and JPMorgan Chase maintained Neutral ratings after the report and urged caution. The stock's ongoing rally has already pushed it above even the most optimistic price targets from the bull camp, supporting the case that Reddit shares have, for now at least, lost the run of themselves. 

The Profit-Taking Setup

With shares now well into blue-sky territory and RSI flashing an extreme reading, the setup for profit-taking is pretty clear. Momentum traders who bought in during the July breakout have substantial gains to lock in, and even a minor dip in broader market sentiment could trigger some quick selling.

But for long-term investors, such a pullback should be viewed as an opportunity rather than a threat. The combination of a strong balance sheet, robust free cash flow, and double-digit revenue growth gives Reddit plenty of ammunition to keep expanding.

Don't forget, Reddit shares have been here before. After their earnings report last October, the stock popped more than 50%, sending its RSI up to 88%. This was followed by a swift 10% dip that was mostly profit-taking before shares again turned north.

That time, they didn't stop until they'd gained more than 100%, so don't be surprised if something similar happens this time around.

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The article "Is Reddit Stock Too Hot, or Just Right?" first appeared on MarketBeat.