Is Reddit Stock a Buy Now?

Reddit (NYSE:RDDT) is a social media and forum site known for its active and highly engaged communities. By traffic volume, Reddit is estimated to be the fifth-largest US website and the eleventh-largest globally.

As a go-to source for information, product recommendations and discussions of niche topics, the platform is also a household name among practically all internet users.

Reddit went public in March with an initial price of $34 per share. Since then, the stock has appreciated by over 75% to trade at just over $60. Can Reddit continue this impressive run, and is the stock a buy in today’s market?

Rapid Growth & Enormous Popularity

Reddit’s standout feature as a business at this point is its extremely high rate of revenue growth. In Q2, the company reported total revenue growth of 54% to $281.2 million.

Accompanying this revenue growth is a similarly high rate of user base expansion. In Q2, for example, Reddit saw its weekly active unique (WAUq) visitor base rise 57% to over 340 million. This rate was even higher in the US, where WAUqs grew by 68%.

This user growth adds to Reddit’s already impressive standing among US users. There are over 500 million accounts currently on the website, and nearly 45% of users are between the ages of 18 and 29. This gives Reddit disproportionate exposure to young users who are prime targets for advertisers.

Another positive for Reddit investors is its fortress-like balance sheet. With $2.08 billion in total assets and just $182.5 million in liabilities, Reddit is in an unusually strong financial position.

The firm’s debt-to-equity ratio is 0, and the current ratio is 12.4. As such, Reddit has a great deal of latitude to continue investing and can operate at a loss for very long periods of time as it builds its revenues.

Finally, Reddit may be able to capitalize on more than just its value as an advertising platform. With a vast library of data built up on its forums over multiple decades, Reddit’s data alone is likely to be highly valuable for training AI models.

The company has already licensed its data to Google’s AI models for an estimated $60 million per year. As data becomes more and more valuable, Reddit’s unique datasets may well be among its largest assets.

No Profits After Almost 20 Years

Reddit’s most glaring problem is that it has been in existence for nearly two decades without ever managing to turn a profit.

Even with rising advertising revenues and the value of its data working in its favor, this fact calls into question whether and when the company could actually report positive earnings.

Although losses narrowed to $10.1 million in Q2 from $41.1 million in the year-ago quarter, the company’s long losing streak raises concerns for investors.

A related issue may show up in the company’s seemingly very positive balance sheet. While it’s clear that Reddit has an excellent balance of assets to liabilities, its double-digit current ratio could suggest that the company may, paradoxically, have too much cash to invest effectively in growth. Without existing outlets for deploying its large cash reserves, Reddit could struggle to make the most of the capital it has been able to raise.

What About Valuation?

Because it isn’t yet profitable and has only been public for a very short time, determining whether or not Reddit is fairly valued is no mean feat. A decent place to start, though, is examining the ratio between the company’s price and its probable full-year revenues.

For the third quarter, management projects revenue of about $300 million, plus or minus $10 million. Assuming Q4 delivered a similar result, full-year revenue would be somewhere in the vicinity of $1.12 billion.

With its market cap currently sitting at about $9.18 billion, the current ratio between the stock’s price and potential full-year sales would be about 8.2.

Comparing this to Meta’s price-to-sales history, it appears that this ratio may in fact be sustainable for a fast-growing social media platform. Meta, then trading as Facebook, was reliably priced at double-digit multiples to sales through its first five years on public markets. Even today, the much larger, more mature Meta trades at 8.8x sales.

Another decent metric to look at is Reddit’s price-to-book ratio, which stands at 5.1. Though high, this number once again compares well with Meta’s current price-to-book of 8.4. Pinterest, another small and non-dominant social media platform, trades at 6.4x sales and 6.7x book.

Though both Meta and Pinterest are actively profitable, these comparative ratios suggest that Reddit’s valuation may be supported by the market if it can continue moving toward profitability.

So, Is Reddit Stock a Buy Now?

In spite of its long streak of financial losses, Reddit’s revenue growth of over 50% year-over-year makes it a strong buy now.

With a similar amount of growth in active unique users and an entrenched position as a go-to information source online, Reddit has attractive prospects and a unique moat that have the hallmarks to make it a long-term winner.

With that said, it’s important to recognize that Reddit carries inherent risks as a pre-profit company. Even with a strong balance sheet that provides it ample financial protection, it’s not yet clear when Reddit will become profitable or what kind of earnings investors might be able to expect when it does.

This uncertainty is reflected in analyst price forecasts for Reddit. Price targets over the coming 12 months range from $50 to $84 per share. Given the stock’s most recent price of $60.03, these forecasts imply anything from a loss of about 17% to a gain of 40%. At the median price of $70 per share, Reddit would return about 16.6% over the next year.

Even though it’s fairly risky, Reddit could have decent upside if it can keep paring back its losses and maintain strong revenue growth.

Risk-tolerant investors may find value in this stock’s long-term growth story, though more conservative buyers may prefer a wait-and-see approach.

If Reddit can keep its growth up and eventually achieve margins similar to other large tech companies, though, it’s possible that the business could become very profitable in the long run.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.