Reddit (RDDT) heads into its July 30 earnings report with strong growth, but investors are already expecting a lot from the social media company. In the first quarter, revenue rose by 69% from a year earlier to $663.4 million, while daily active users increased 17% to 126.8 million. Reddit also earned $204 million in net income and generated $311.2 million in free cash flow. However, potentially ending its deal with Google (GOOGL) could change the story.

Claim 55% Off TipRanks

• Unlock powerful investing tools with TipRanks Premium to make smarter, more confident investment decisions
• Subscribe to TipRanks Smart Investor Newsletter, and discover new investing opportunities with data-backed stock picks

Catalysts that May Push the Stock Higher

Advertising is still Reddit's biggest growth driver. In fact, first-quarter ad revenue jumped by 74% to $625 million as the company showed users more ads and charged advertisers more for them. Ad impressions rose about 32%, while average pricing increased by roughly the same amount. This suggests that brands are seeing value in Reddit's communities, where users gather around specific interests. Reddit's AI tools may help as well by placing ads beside more relevant conversations.

In addition, management expects second-quarter revenue of $715 million to $725 million, along with adjusted EBITDA of $285 million to $295 million. Results above those ranges could push the stock higher. International growth may offer an even larger opportunity over time. Weekly active users outside the U.S. increased 33% in the first quarter, compared with 10% growth inside the country.

However, Reddit earns much less from each international user. More specifically, average revenue per International user was only $2.02, versus $9.63 in the U.S. Still, better translation tools and more local content could help close part of that gap. Reddit's large collection of real human conversations could become more valuable to AI companies as well, thereby generating more high-margin licensing revenue.

Risks to Watch Out For

Nevertheless, the biggest risk is Reddit's heavy dependence on advertising. Ads made up about 94% of first-quarter revenue, so weaker demand from advertisers could quickly slow growth. Revenue is also rising much faster than the user base, which means that Reddit is relying heavily on higher ad prices and more ads per user. That works while demand remains strong, but it could become a problem during an economic slowdown.

Separately, Reddit's relationship with Google adds another concern. The company is reportedly reviewing a data-licensing deal worth about $60 million per year because Google's AI summaries may reduce clicks to Reddit. A new agreement could improve the terms, but ending the deal could hurt both licensing revenue and search traffic, which could send RDDT stock lower.

Is RDDT Stock a Good Buy?

Turning to Wall Street, analysts have a Moderate Buy consensus rating on RDDT stock based on 13 Buys, eight Holds, and zero Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average RDDT price target of $226.29 per share implies 26.4% upside potential. (See RDDT Stock Forecast).