u/the_amateurinvestor

After the S&P 500 inclusion I figured now was a good time to re-run my analysis on Reddits valuation that I ran when I initially opened my position.

I use a few different ratios to help make my evaluation. PEG ratio which I get from multiple sources and take an average of the findings since it is a rather speculative ratio where the person calculating the ratio uses an expected earnings growth rate. For Reddit, this average PEG ratio is around .65. Generally, anything under 1 is considered undervalued.

P/E ratio is used to help find the expected growth in earnings. For Reddit in after hours trading we are around a 38 P/E ratio. By dividing the P/E ratio by the PEG ratio you can find the average Wall Street expectation for earnings growth in percentage. For Reddit this number is around 58% expected earnings. I tend to value a company on a 1 year forward looking basis so I take the current earnings per share TTM of 4.59 and multiply it by the expected 58% growth and that give us an expected earnings per share of around 7.25 future earnings per share.

Further applying that potential future earnings per share of around 7.25, I multiply that earnings number by a reasonable P/E ratio of 30 to assume the stock is trading at a general fair value for a growth stock. After this I arrive at my 1 year price target given Reddit reaches lofty goals of 58% growth in earnings of around $217.50 a share.

This valuation method is only useful as long as a company continues to meet or exceed expectations and Reddit checks those boxes for me as they continuously meet their own expectations. Given this fair value of $217 and we are trading around $176 in after hours we still have a near 25% upside in my forecast. I believe in Reddits ability to scale and will continue to update my model quarterly. Not financial advice but I rate Reddit as a buy even after this run.

I found an old Reddit account to come and give my take on the stock. I usually use Reddit from my web browser and logged off just because when I google topics I usually click the link that takes me to Reddit to read posts of bear/bull cases on the subreddits of stocks that I am interested in buying and at some point wondered why not check Reddit out as an investment.

The financials stuck out to me at first with revenue growth of over 60% y/y and a profit margin around 91% on the surface it feels like a no brainer. With a slightly deeper dive you hear the bear case mentioned quite a bit here with lots of complaining about SBC and insider selling (which I believe is a non-factor long term). Reddit is able to maintain such a high profit margin by offering the share compensation to its executives and in the long run this will help lower costs for the company as the company just repurchases the issued shares with the massive free cash flow.

The bigger issue will be user retention and growth internationally. One thing I’ve seen mentioned before is that Americans typically have trouble looking beyond our borders and that may be why investors hyper focused on the Q/Q decline in U.S. DAU and completely ignored the 18% y/y increase in international users. If Reddit is able to grow DAU worldwide and not just within the United States and increase the revenue generated per user they should continue to smash earnings estimates and maintain these impressive margins.

As someone who was usually a logged out user I never really thought to log in until I felt like I wanted to share my thesis on the stock, that may be the biggest issue with Monetizing the ad revenue of the users. Logged in users can generate a higher revenue per user since Reddit has more data on their interests based on subreddit usage and interactions. Reddit has begun trying to use walls blocking content of frequently non-logged in users (worked on me today) to get them to download the app. I believe the content in Reddit has me coming back to hear actual opinions of people rather than some LLM that will regurgitate any opinion you want it to have. Once logged in users may experience a sticky effect and keep coming back for the various subreddits on the site on whatever is interesting to them at the time.

I won’t get too much into the AI deal section of the company because most of that is hearsay at this point. But if Reddit is able to generate expense free cash flow from LLM training then that is just another cash flow source with extremely high profit margins. I expect Reddit will eventually reach a deal probably based around usage rates from each of the major AI models.

Overall I think Reddits share price has massive upside opportunity. A company maintaining growth of around 50% a year in revenue trading at a P/E ratio below 40 is a steal in my opinion. I can’t really grasp why it is valued so cheaply it is actually mind blowing. Maybe I’m wrong we shall see but this is definitely not investment advice, just an opinion on a site used for sharing them.