Sun, August 2, 2026 at 8:05 AM UTC
Key Points
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Roblox is beginning to look like a business that will never be profitable.
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Reddit stock is cheap and has a couple of potential catalysts.
The stocks of Roblox(NYSE: RBLX) and Reddit(NYSE: RDDT) both crashed after they reported earnings after the bell on July 30. However, Reddit is the only one worth buying on the dip, in my view. Let’s look at why.
Both Roblox and Reddit stocks have had tough years, with Roblox plunging nearly 60% this year and the latter 40%. While both stocks sank more than 20% following their latest earnings reports, Reddit looks like the much better bet to rebound, while Roblox is starting to look like a broken company.
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Cratering stocks
Both companies struggled when it came to user growth. Roblox’s daily active users (DAUs) rose 10% to 123 million, but that fell far short of the 128.7 million DAUs analysts were expecting. Reddit saw its daily active unique users (DAUq) climb 18% to 130.3 million, ahead of the 129.9 million analyst estimate, but U.S. DAUq increased by just 6% to 53.2 million.
Roblox blamed its user growth issues on new safety measures, such as age verification, for hurting user growth and customer engagement. Reddit, meanwhile, suffered choppy Google search referrals.
Reddit and other publishers have seen their search referrals tumble as Alphabet pushes Google AI Overviews. In response, Reddit is reconsidering a $60 million-a-year deal it has with Alphabet that lets the search giant train its model on Reddit data, which is set to expire soon. A successful negotiation that also better directs traffic to its platform could be a big catalyst.
Roblox is in a more precarious situation. Its user base skews very young, and lawsuits from state attorneys general forced the company’s hand to implement strong safety measures, which have been negatively impacting its growth. Meanwhile, after surpassing 45 million monthly European Union users, the platform is likely to face more strict monitoring requirements in this region.
Between infrastructure and server costs, trust and safety expenses, and developer exchange fees (what it pays out to game makers on its platform), Roblox only has around a 30% gross margin, while it also continues to incur huge stock-based compensation (SBC) expense. When taking into account stock-based comp, Roblox does not have a great business model, and its bookings (which are more reflective of the current state of its business than revenue, given how sales are recorded) are seeing pressure. Bookings grew only 8% to $1.6 billion this past quarter, while the company forecast bookings to decline by 14% to 18% next quarter. The weak forecast comes despite the company reentering the Russian market in June.
Overall, Roblox doesn’t look like a company with a clear path to profitability, barring its ability to greatly reduce costs through AI. While this is possible, it’s not something I’d be willing to bet on just yet.
While Roblox’s business has been struggling, Reddit’s overall business remains strong despite the clear user- and search-related headwinds. Its revenue surged 61% last quarter to $804.9 million, while its earnings per share (EPS) nearly tripled to $1.25. Growth was strong across regions, with U.S. revenue up 56% to $638.1 million, and international revenue soaring 84% to $166.8 million.
Ad revenue climbed 64% year over year to $762 million, as average revenue per user (ARPU) soared 36%, including 51% in the U.S. Other revenue, which includes data licensing, grew 24% to $43 million. Meanwhile, the company’s gross margins edged up 50 basis points to 91.3%.
And while Roblox expected a significant decline in its business next quarter, Reddit projected revenue growth of 47% to 49% in Q3. It also said it was seeing good leverage with stock-based compensation expense, and as a result, it lowered its full-year outlook for SBC to be low to mid-teens as a percentage of revenue.
Time to buy Reddit
Reddit is a more structurally attractive business than Roblox, with higher gross margins. Like other social media companies, it is leaning into AI to help improve ad targeting and conversion, which is driving growth. Meanwhile, reworking a better deal with Alphabet and possibly securing other data-licensing deals would be a catalyst.
With the stock trading at a forward P/E of just 15 times 2027 analyst estimates, Reddit looks like a rebound candidate worth betting on.
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Geoffrey Seilerhas positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Reddit, and Roblox. The Motley Fool has adisclosure policy.
