Reddit, Inc. (RDDT)

Conclusion

Reddit, Inc. operates an online platform of interest-based communities where users discuss topics, share links, images and videos, and exchange goods and services. At 100.79 USD per share, the company has a market capitalisation of 14.81 billion USD.

The verdict is fair. The shares trade on a price-to-earnings ratio of 14.9, an enterprise value to EBITDA of 11.8 and a price to free cash flow of 12.4, but the ten-year medians for these multiples are not available because the history is too short. The DCF gives 94.85 USD per share. The fair value band runs from 75.88 to 113.82 USD with a midpoint of 94.85 USD, a margin of safety of -5.9% at the current price. The reverse DCF implies growth of 16.95% a year, against revenue growth of 57.3% a year over five years and 48.9% over three years.

The strongest numbers are the return on invested capital of 169.7% against a WACC of 16.3%, net cash equal to -3.00 times EBITDA, and eight beats in eight quarters of earnings surprises. The weakest are the share count, which has grown at 4.35% a year over five years, stock-based compensation at 12.5% of revenue, and a margin of safety that is slightly negative.

Financial health

Financial strength is green, held up by net cash, a current ratio of 10.80 and an Altman Z-score of 26.05 in the safe zone. Net debt to EBITDA is -3.00 and debt to equity is 0.0088. The quick ratio is 10.54. Interest coverage is not available because the company does not report its interest expense. The Altman model was designed for manufacturers, and Reddit is not one, so its zone is indicative only. Insolvency risk is low, about 0.0% by the estimate of the Ohlson model over the coming one to two years. The balance sheet gives little reason for concern on liquidity or solvency.

Earnings quality

Earnings quality is yellow: cash conversion and earnings beats are strong, but dilution is a clear weakness. Free cash flow conversion is 120.8% on a trailing twelve-month basis, while the five-year figure is not available. The accrual ratio is -5.78%, which means cash earnings exceed reported earnings. Stock-based compensation is 12.5% of revenue, and free cash flow after it is 812.3 million USD. The share count has risen at a compound 4.35% a year over five years, so there are no net buybacks. The Piotroski score is 6 of 8 evaluable tests passed. The Beneish M-score is not available. The company beat in all 8 of the last quarters, with an average surprise of 215.4%. Current-year estimates rose 2.52% over 90 days, while next-year estimates fell 1.13%.

Profitability

Profitability is green. The operating margin is 29.4% against a ten-year median of -26.0%, and the net margin is 32.1% against a median of -24.8%. The gross margin is 91.6% against a median of 85.6%, and operating margin stability is 97.4%. Return on invested capital is 169.7% against a WACC of 16.3%, so the given ROIC minus WACC value is 1.5343, or 153.4%. The DuPont split for 2025 shows a net margin of 24.1%, an asset turnover of 0.68 and an equity multiplier of 1.11. Return on equity of 27.7% therefore comes mainly from margins, not from leverage. The WACC uses an assumed cost of debt of 6.9% and a tax rate of 0%.

Growth

Growth is green. Revenue has a compound annual growth rate of 48.9% over three years and 57.3% over five years. It grew in all 5 of the 5 comparable years. The compound growth rate of earnings per share is not available. Analysts expect earnings per share to grow 20.35% next year. Growth has been very fast, but the price now implies much slower growth than the company has delivered.

Valuation

Valuation is yellow, because the margin of safety is slightly negative even though the multiples are moderate. The price-to-earnings ratio is 14.9, the enterprise value to EBITDA is 11.8, the price to free cash flow is 12.4, the price to sales is 4.8 and the price to book is 4.1. The free cash flow yield is 8.09% and the earnings yield is 6.7%. The ten-year medians for these multiples are not available. The DCF gives 94.85 USD per share at a discount rate of 16.27%, with growth of 20% in the first stage and 2.5% in the terminal stage. The fair value band runs from 75.88 to 113.82 USD, and the margin of safety is -5.9%. The reverse DCF implies growth of 16.95%, against five-year revenue growth of 57.3%, a difference the model puts at -40.3%. The terminal value makes up 37.4% of the DCF. The company pays no dividend. These are estimates built on fixed assumptions, not a price target.

Risks

The main risk is dilution. A share count rising 4.35% a year, together with stock-based compensation at 12.5% of revenue, means shareholders' claim on the business shrinks more slowly than earnings growth suggests. The valuation has little room for error because the margin of safety is -5.9%. The beta is 2.275, so the shares may be more volatile than the market. Several values are not available: interest coverage, the compound growth rate of earnings per share, the Beneish M-score, the five-year free cash flow conversion, the ten-year medians of the multiples and the fair value from historical multiples. The analysis has further limits. It has no debt maturity schedule and no revenue by segment, and the cost of debt is assumed because the interest expense is not reported.