Reddit (RDDT): Profitability Achieved, Lofty Valuation Challenges Bullish Market Narratives

Reddit (RDDT) has swung to profitability, notching average annual earnings growth of 2.6% over the past five years and boosting net profit margins as it topped breakeven in the last twelve months. Consensus now expects earnings to rise 36.2% per year over the next three years, with revenue also projected to climb 24.9% annually. Both of these figures are far ahead of the broader US market. The upshot for investors is a company showing real momentum in both profits and revenue, with its recent results placing a spotlight on whether high growth potential can justify a premium share price.

See our full analysis for Reddit.

Now that we have the latest numbers, it’s time to see how they measure up against the most widely followed market narratives. Some long-held views are likely to be reinforced, while others may get put to the test.

See what the community is saying about Reddit

Profit Margin Target Doubles Over Next Three Years

• Analysts expect Reddit’s profit margin to jump from 13.0% today to 26.5% by 2028, signaling a dramatic potential improvement in operational efficiency.
• According to the analysts' consensus view, this margin expansion is underpinned by two drivers:
  • The value of Reddit's user data for AI/LLM training and strengthened platform retention, with data licensing adding $35 million out of $500 million in Q2 revenue, is expected to grow as a high-margin segment.
  • Product changes like unified search tools and rising international adoption are forecast to improve average revenue per user, supporting sustained earnings growth as new markets contribute to profitability.
• To see how Reddit’s push for higher margins could influence the bigger picture, check out the full consensus narrative for deeper insight on market expectations. 📊 Read the full Reddit Consensus Narrative.

DCF Fair Value Signals Discount, But PE Ratio Remains Stretched

• RDDT currently trades at $208.95 per share, well below its DCF fair value of $313.84. Its price-to-earnings ratio stands at a very high 113.4x, more than 6x the US interactive media industry’s 16.5x average.
• The analysts' consensus view notes a clear valuation trade-off:
  • Compared to the industry, Reddit’s valuation implies a premium that only sustained, above-market growth in earnings and margins can justify over time, backed by forecasts for 36.2% earnings growth per year in the near term.
  • Despite the DCF-based discount, the current share price sits only slightly below the analyst price target of $240.27, indicating that most expectations for upside are already priced in. Future surprises, positive or negative, may have a major impact on sentiment.

International Growth Emerges as a Wild Card

• With early success in non-English markets and accelerated rollout of machine translation, Reddit’s international user and advertiser growth is beginning to show signs of traction. True local relevance is not yet established, creating both opportunity and risk.
• The analysts' consensus view highlights the tension here:
  • Success in expanding community and engagement abroad could add meaningful revenue and margin upside, leveraging Reddit’s distinctive user-generated content model in new markets.
  • On the other hand, over-reliance on machine-translated content and challenges in fostering vibrant, localized communities could constrain global growth, especially if international DAUs don’t materialize as quickly as the US.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for Reddit on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

Have a different take on the data? It only takes a few minutes to share your own perspective and shape the story. Do it your way

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

See What Else Is Out There

Despite robust top-line growth, Reddit’s high price-to-earnings ratio signals that much of its optimistic future is already reflected in the share price. This suggests limited near-term upside.

If you’re looking for better value and growth potential, consider switching your focus to these 840 undervalued stocks based on cash flows, where you’ll discover stocks currently trading at more attractive valuations.

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.

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