Roblox and Reddit Crash 20%, but Only One Is a Buy

Reddit plunged 22 percent Friday on choppy search referrals, while Roblox fell more than 20 percent after BMO Capital cut its price target to $45 from $100.

"Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter," Steve Huffman, co-founder and chief executive of Reddit, said in a letter to shareholders.

Reddit still beat estimates, posting second-quarter earnings of $1.25 per share on revenue that rose 61 percent year over year to $804.9 million, topping the $0.97 and $732.4 million analysts expected. Daily active uniques climbed 18 percent to 130.3 million. Roblox, by contrast, faces persistent questions about whether it will ever turn a profit.

The divergence matters for investors weighing the two consumer internet names. Reddit trades at a discount after the selloff, with AI content licensing and international expansion ahead, while Roblox's path to profitability remains unclear, leaving its valuation harder to justify.

The selloff came during a turbulent week on Wall Street. The Nasdaq Composite surged 2.78 percent to 25,122 on Thursday after Microsoft's strong results and encouraging economic data, while the S&P 500 gained 1.66 percent to 7,437 and the Dow Jones Industrial Average rose 1.19 percent to 52,209. The 10-year Treasury yield stood at 4.67 percent, and gold held near $4,018 as central banks bought the dip.

Reddit's Search Referral Problem

Reddit's warning about search referrals spooked investors even as the company delivered a beat. Huffman acknowledged low visibility into referral traffic but said the company is "building a daily destination" rather than chasing drive-by traffic. Shares have now lost about 40 percent of their value since the start of the year, a decline that has pushed the stock to levels some analysts consider attractive given the company's growth and licensing pipeline. The company's AI content licensing deals with major model developers and its push into international markets give investors concrete reasons to expect revenue to keep climbing even if search traffic stays volatile.

Roblox's Profitability Question

Roblox's slide reflects a different concern. BMO Capital's cut to a $45 target points to doubts about the gaming platform's ability to generate sustainable profits. The company has yet to convince investors it can convert its large user base into consistent earnings, a gap that separates it from Reddit, which is already profitable and growing revenue at a 61 percent clip. Roblox's heavy investment in content and infrastructure has kept margins thin, and the stock's valuation offers little cushion if growth slows.

For investors, the choice comes down to growth quality. Reddit combines profitability with a cheap valuation and identifiable growth drivers, while Roblox offers scale but no clear path to the bottom line. Until Roblox demonstrates it can make money, the risk-reward favors Reddit.

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