Reddit, Inc.'s (NYSE:RDDT) 28% Jump Shows Its Popularity With Investors

Explore Reddit's Fair Values from the Community and select yours

Despite an already strong run, Reddit, Inc. (NYSE:RDDT) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 255% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, you could be forgiven for thinking Reddit is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 22.6x, considering almost half the companies in the United States' Interactive Media and Services industry have P/S ratios below 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

See our latest analysis for Reddit

What Does Reddit's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Reddit has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Reddit will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Reddit?

The only time you'd be truly comfortable seeing a P/S as steep as Reddit's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 70% last year. The latest three year period has also seen an excellent 181% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 32% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 13% per annum, which is noticeably less attractive.

In light of this, it's understandable that Reddit's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in Reddit have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Reddit shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Reddit with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Reddit, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.