The social media company has been generating fantastic numbers, but its stock comes at a hefty premium.
Reddit (RDDT -11.84%) is one of the most visited websites globally. Its focused subreddits allow advertisers to target specific types of users effectively, without the need for cookie tracking. If someone is browsing a particular subreddit, it’s a strong indicator of their interest in that topic.
The monetization opportunities for Reddit are substantial, and the company has been showcasing impressive growth. Investors have responded positively, leading to a remarkable valuation increase. Over the past 12 months, Reddit’s stock has surged by more than 260% (returns as of Sept. 29), elevating its market cap to $45 billion.
However, the question arises: Has the stock risen too quickly? Is it too late to invest in Reddit, or does it still represent a viable growth stock for your portfolio?
Image source: Getty Images.
Reddit’s Fundamentals Look Terrific
Reddit has not only been generating strong revenue and user growth, but its margins and overall earnings are also impressive. In its most recent quarter, ending June 30, revenue rose by 78%, totaling $500 million. Additionally, daily active unique visitors increased by 21% to 110.4 million. The company’s strong gross profit margin was just under 91% of revenue, allowing it to post a solid profit margin of around 18%.
These excellent margins could facilitate future growth in the bottom line, which is crucial for the stock’s continued rise in value. However, while its valuation may increase, it can still appear cheap concerning earnings. Currently, its price-to-earnings (P/E) multiple is not particularly low, which may deter investors concerned about inflated market valuations.
The Stock is Trading at More Than 100 Times Its Trailing Earnings
Investing in a fast-growing stock often requires paying a significant premium, and Reddit is no exception. Its P/E multiple currently exceeds 100, which is steep compared to other social media stocks like Meta Platforms and Pinterest, trading at multiples of 27 and 12, respectively.
Paying such a high multiple leaves little to no margin of safety should the company face growth challenges. This scenario could lead to a sharp sell-off. Despite the enthusiasm surrounding Reddit’s stock, the consensus analyst price target is around $202, indicating a potential downside risk of 17% from current trading levels. While analyst price targets are not definitive, they can help gauge whether a stock is overpriced or undervalued. Given the high P/E multiple, a strong case can be made that Reddit’s stock is indeed overpriced.
Is Reddit’s Stock Worth Buying?
While I find Reddit’s stock appealing, I hesitate at its current valuation. It has proven to be highly volatile this year, dropping to around $80 when reciprocal tariffs were announced in April, which sent the overall market into a tailspin. With the economy still uncertain, I worry that Reddit could face another significant correction soon.
If you plan to invest for the long haul and hold the stock for at least five years, Reddit may still be a good buy. Its platform holds considerable value for marketers, and its growth potential in international markets looks promising. However, in the short term, be prepared for the possibility of a correction.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Pinterest. The Motley Fool has a disclosure policy.
