The Case for Reddit
A Dream for Advertisers.
Reddit has always been a place for people with contrarian views so it makes sense that people have differing opinions about its value.
The stock debuted in March of 2024 at $46 per share before quickly climbing to $225 in February of 2025. An almost 5x return in under a year. But Reddit soon dropped dramatically, falling to under $90 only two months later in April. Those who bought the dip soon made their money as the stock once again tripled in seventh months, climbing to its all time high of $270 in September of the same year. Reddit then dropped again, climbed again, and fell once more where it continues on its downward trend. The stock is currently down almost 50% from its all time highs just over half a year ago and is already down over 40% already Year-to-Date (YTD).
So why invest? What’s the point in investing in a company with a stock price that looks like its being adjusted by a drunk man who randomly picks a price target every three months.
The Platform and the Potential:
A little bit about the company before I go into some of their impressive financials and why I think the company has great potential going forward. Reddit is a platform that allows users from all over the world to come together and discuss different topics. They have over 120 million daily active users (DAUs), almost 500 million weekly active users and between 850-900 million monthly active users. Over 6% of the world uses Reddit every single week. Reddit is no longer a niche company, they are becoming a social media powerhouse. Reddit’s users log in daily to discuss cooking, sports, politics, business or a million other topics. Reddit’s chess subreddit has almost two million members. R/Funny, Reddit’s hub for humor and memes has 67 million members. If you are looking to discuss any topic that interests you, Reddit is the place to go and with hundreds of millions of active users, you are guaranteed to find others looking to discuss the same topics that interest you.
And this sets the stage for over 90% of Reddit’s revenue: advertisements. Reddit is the ideal place for advertisers and it is very easy to understand why.
Imagine you are a protein drink company, focused on delivering both a tasty and nutrition boosting drink. You can either go around the city, putting up posters on every random pole you see, or you can contact your local gym and ask to put up a sign inside the gym on the wall. Same sign, different location, different end result. One sign will probably be half erased after it rains and eventually replaced by a poster of a missing cat called Turnip, whose hair is allegedly ginger although you can’t tell because the printed picture is in black and white. The other poster meanwhile, identical in all but location, has generated thousands of dollars worth of sales as it is in the perfect location targeting its target audience right when they need the product the most. This isn’t hypothetical, my gym currently displays pictures of energy drinks on the walls.
Reddit is the perfect environment for advertisers. Imagine you are the CEO of a kitchen utensil company selling knives, pots and pans and you want to promote your company somewhere. You can either promote it on a platform like Youtube, where algorithms use behavior tracking, watch history and search habits to give certain ads to certain people, or you can go to R/Cooking and find people who are interested in cooking and advertise at the specific moment their attention is on the subject. You can go further, and go to R/Knife Deals, a subreddit I will admit I did not know about until I wrote this article but nonetheless, a subreddit that boasts over 11,000 weekly active users. Even more specific, you can find a post that has gone viral written by a frustrated user whose knives keep going dull and advertise on that specific post about your knives which never go dull. You can guarantee that like the poster in the gym, your product reaches the perfect target audience. Youtube continues to bombard me with ads for Preply, an app I am already signed up for as a tutor rather than a student.
Trust and Data Monetization:
Reddit also has another huge advantage when it comes to advertising their products. Reddit’s users have impressive faith in the company and its ability to help them choose products. In a survey conducted by the company in 2023, 74% of users said that they would “use Reddit if they needed to go deep into a product category/topic. - Ranking Reddit #1 for these behaviors compared to all competitor social media platforms, influencers, Amazon and independent review sites.” In addition, “74% of people agree that Reddit helps them make faster purchase decisions,” and “74% of people reported satisfaction with a purchase they made based on information found on Reddit.” These are incredible customer satisfaction numbers and point to Reddit being the ideal place to advertise, a target audience that believes in the place giving them ads.
And these ads have been rapidly growing the company. Reddit has jumped from $800 million in revenue in 2023, to $1.3 billion in 2024, and up to $2.2 billion last year - an average of 65% increase in the last two years. Reddit’s first profitable quarter was only Q3 of 2024, where they made less than $30 million. Since then, they have continued increasing margins and in the most recent quarter, only 15 months later, they announced over $250 million in net income. The company is continuing to project massive revenue gains and they expect 52-54% revenue gains Year-over-Year (YoY) moving forward. With more daily active users, the company should continue to boost revenue and profitability.
Reddit also has another gem that they have recently begun to sell: data. In only the first half of 2024, Reddit had over 5.3 billion pieces of content. This is a massive amount of data and real human-human conversations. Who needs this? LLM’s in order to train. This has caused Open AI and Gemini to make deals with Reddit. Google is paying Reddit $60 million annually for Reddit’s data, Open AI’s deal, although not publicly announced, was rumored to be between $60-70 million. These are deals with extremely high margins that should continue and expand year after year as more LLM’s emerge and require massive amounts of real conversations in order to train their models. For a company like Google, which plans to spend almost $200 billion on Capex in 2026, this deal with Reddit is a drop in the bucket and yet it is a partnership that is “strategically critical for maintaining its competitive edge in search and AI development.”
Furthermore, due to more and more AI content being pushed online, Reddit is one of the few places that LLMs can truly rely on the content being authentic human conversation. Even this article could be written by an LLM, it’s not, which is why it’s probably not that good. But in a world where more and more content is moving towards “AI slop,” Reddit is a bastion of human content. If Reddit remains one of the only places where authentic human opinion and conversation exist, their leverage in the next round of negotiations will be much stronger.
And yet despite all this positive information, despite growing revenues, despite being a cash heavy company - a hoard of cash that is increasing by 47% per year - with no debt, Reddit has now reached its lowest valuation ever. This is the first time that their P/E ratio has dipped to the 50 mark. 50 is still high for a regular company, but for a massive tech company that recently went public, I would argue this valuation is either accurate or even low moving forward. Meta was at a P/E of over 1000x soon after its IPO, and even three years later, they traded at a PE of between 90-118. Important to note, at that point in 2015, Meta’s stock price was about $80 at the time, and it has continued growing consistently to the $650 it is at now.
Looking at the data on Reddit the Price-To-Sales (P/S) is currently at 12.28. The last time it was this low was April 4th, the day it hit its rock bottom and right before the stock shot back up. If I overlay the Price-To-Sales on the stock chart, you can clearly see how the stock shot up soon after hitting the current valuation.
Finally, if I plug some information into a DCF (Discounted Cash Flow) calculator (A DCF calculator is a calculator where you use a mix of the companies current and future projections, in order to understand what their future projected stock price will be,) and plug in relatively conservative numbers, I get an average return of 12.5% per year for the next five years. The buy-in price to get a 10% return would be $163. The current stock price at $146 is an 11% discount. I used Reddit’s Trailing Twelve Months (TTM) EPS, of 2.66, I used a growth rate of 27%, (conservative for a company growing so quickly) and a EPS multiple of 30, implying that the PE cools down significantly.
Even putting in conservative metrics that I think the company will easily surpass, (EPS Growth Rate of 20 and EPS Multiple of 25) the stock still gives a 2.5% return over the next five years. This is a failure, in the sense that to invest in a stock you should have conviction that the stock will give at least 10% returns, otherwise it is better to simply invest in the S&P 500 which averages consistent returns of 10% that are usually less volatile than a single company. That being said, unless Reddit falls off a cliff, it should provide double digit returns going forward for the next few years.
Reddit’s management agrees with me, which is why they authorized a buyback worth $1 billion. It’s usually a good sign when a company wants to spend a large chunk of their money buying back their stock.
Today, I don’t know if the stock will shoot back up or if it will continue dropping to $80 a share over fears that the stock is still trading at too high a valuation, what I do know, is that the company has a healthy long term outlook and today, down 40% YTD it seems like an attractive place to buy in. With the way the market is currently acting, it’s extremely hard to know when the exact moment to buy is, but if you buy good companies and hold for a long time, investing today or tomorrow shouldn’t matter too much.
Disclaimer: For those of you reading this, remember I’m sharing my personal journey and opinions, not professional investment picks.