Reddit, one of the world’s most visited websites, has been racking up impressive numbers, but its stock is trading at a steep premium. The platform’s specialized subreddits allow advertisers to target specific audiences without relying on cookies—if a user is active in a particular subreddit, it’s a solid indicator of their interests.
With substantial monetization potential, Reddit has been experiencing remarkable growth, which has led to a soaring stock valuation. Over the past year, the stock has surged more than 260% (as of September 29), pushing its market cap to $45 billion. But with such rapid growth, is it too late to invest in Reddit, or does it still represent a promising opportunity for growth?
Strong Fundamentals Backing Reddit
Reddit’s performance is bolstered by strong revenue and user growth, with impressive margins and earnings. In its latest quarter, ending June 30, revenue jumped 78%, reaching $500 million, while daily active unique visitors rose 21% to 110.4 million. The gross profit margin was nearly 91%, contributing to a solid profit margin of around 18%.
These robust margins suggest that Reddit can continue to grow its bottom line, which is crucial for maintaining its stock value. Despite the high valuation, Reddit’s earnings remain attractive. However, its current price-to-earnings (P/E) ratio is elevated and may deter investors concerned about inflated market valuations.
High Valuation Risks
Investing in high-growth stocks often means paying a premium, and Reddit is no exception. Its P/E ratio exceeds 100, a stark contrast to peers like Meta Platforms and Pinterest, which trade at multiples of 27 and 12, respectively. This high multiple leaves little room for safety if the company faces challenges that hinder growth, potentially leading to a sharp sell-off.
Analysts have set a consensus price target of about $202 for Reddit, indicating a potential downside risk of 17% from its current trading level. While analyst targets aren’t guarantees of future performance, they can help gauge whether a stock is overpriced or undervalued. Given the significant downside risk combined with Reddit’s high P/E ratio, many may argue that the stock is indeed overvalued.
Should You Buy Reddit Stock?
This year has seen Reddit’s stock experience significant volatility. It dropped to around $80 in April amid market turbulence triggered by reciprocal tariffs. With the economy facing uncertainties, there’s a risk that Reddit could undergo another correction soon.
However, if you’re looking to invest for the long term—planning to hold for at least five years—Reddit could still be a worthwhile addition to your portfolio. Its platform holds substantial value for marketers, and its growth potential in international markets remains promising. Just be prepared for the possibility of short-term fluctuations.
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