Reddit (RDDT): Evaluating Valuation Following Lawsuit Headlines and Strong Earnings Momentum

If you have been eyeing Reddit (RDDT), the latest turn of events probably has you leaning in, wondering what comes next. The company is currently navigating a class action lawsuit that alleges it misled investors about growth and revenue projections. Yet the stock has shrugged off the legal noise for now, as investors seem more interested in Reddit’s impressive second-quarter earnings, which showed meaningful gains in both sales and net income. This tug of war between headlines and hard numbers sets the stage for those looking for clarity before making their next move.

This legal challenge certainly grabbed attention, but the market’s reaction has been unmistakably upbeat. Reddit’s stock surged 116% in the past three months, and the positive sentiment has mostly persisted through the year. The momentum comes after a year in which Reddit's performance struggled to impress, but now the narrative seems to be shifting as the company posts healthy revenue and income growth, as well as a sharp rebound in its share price.

So after such a strong rally, is Reddit’s valuation leaving room for upside, or has the market already priced in all the growth the company can deliver?

Most Popular Narrative: 15.1% Overvalued

According to community narrative, Reddit appears to be trading above its estimated fair value. The analyst consensus values Reddit based on long-term projections for explosive revenue and earnings growth, but the current share price is noticeably higher than their calculated target.

The ongoing shift toward platforms built on user-generated content gives Reddit significant headroom for future user and engagement growth. This is evidenced by continued DAU increases, the adoption of tools like Reddit Answers, and successful international launches. These factors all support prospects for long-term revenue expansion and increased monetizable impressions.

Are you wondering what is driving this punchy price tag? The real story is in the model: future profits, rising margins, and bold user growth expectations. This narrative leans heavily on a specific mix of financial forecasts that are not clear at first glance. Ready to find out which projections are supporting that above-market valuation? The full narrative reveals all the surprising details.

Result: Fair Value of $195.96 (OVERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, Reddit’s heavy reliance on digital ads and ongoing challenges in international expansion could quickly change the trajectory of its bullish narrative.

Find out about the key risks to this Reddit narrative.

Another View: What Our DCF Model Says

Looking at Reddit through the lens of the SWS DCF model offers a very different perspective. In this analysis, the company appears to be trading below its calculated fair value, which suggests a possible undervaluation. Could the market be missing longer-term momentum?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Reddit for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Reddit Narrative

If you’d prefer to analyze the numbers on your own and create a narrative that captures your personal insights, you can do so in just a few minutes. Do it your way

A good starting point is our analysis highlighting 3 key rewards investors are optimistic about regarding Reddit.

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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.

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