Reddit, Inc.'s (NYSE:RDDT) P/S Is Still On The Mark Following 31% Share Price Bounce

Despite an already strong run, Reddit, Inc. (NYSE:RDDT) shares have been powering on, with a gain of 31% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, you could be forgiven for thinking Reddit is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 33.9x, considering almost half the companies in the United States' Interactive Media and Services industry have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Reddit

What Does Reddit's Recent Performance Look Like?

Reddit certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Reddit would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 180% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 34% per annum as estimated by the analysts watching the company. With the industry only predicted to deliver 12% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Reddit's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Reddit's P/S

The strong share price surge has lead to Reddit's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Reddit maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Interactive Media and Services industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

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 companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.