$157
$135
HOLD
2025-2029
2025-2029
2029
At the current share price of $157, Reddit, inc. is a hold with a price target of $135. Reddit’s current market price fairly reflects its growth potential and business prospects. While the business is well-positioned to benefit from the cultural shift toward user-generated content and advancements in targeted advertisement, the shares are richly priced.
Reddit offers an online public forum where people can ask questions, create communities called subreddits, and engage with one another. The business makes most of its revenue through advertising on the platform and a smaller amount on premium memberships and leveraging user data for LLM’s. Reddit is moderated by other users through “upvoting” and “downvoting” posts which makes Reddit a uniquely human platform. In an age of increasing technology people come to Reddit to learn and socialize with other users. This has the effect of bringing users together creating a positive impact on society versus a platform that is divisive and harmful.
Founded in 2005, Reddit has long struggled to monetize its user base and reach profitability. In recent years management has shown a renewed focus on advertising while staying true to their mission to bring communities together. The business has found success in creating targeted advertisement for specific subreddits and finding innovative ways to increase monetization per user. Reddit closely tracks and reports their average revenue per unique user (ARPUq) as a metric for business performance.
Reddit operates in the social media industry. The industry can be fragmented in many ways with different niche products; however, a core component of the industry is its’ user-generated content.
In terms of user adoption, the social media industry is relatively mature. Meta platforms has been the pioneer in the space since inception, accounting for over 3 billion global users. Users, however, commonly engage with multiple platforms. On average they use 6.9 different platforms monthly. In the social media industry advertising dollars are the finite resource or market share that platforms are competing for. Over the last decade the share of advertising dollars has grown for the industry. Businesses have shifted marketing spend from legacy platforms like T.V. and news to digital platforms that provide more insightful data. The result has been more efficient use of marketing capital and advertising that consumers find useful. The industry’s market share is expected to grow globally through the next decade and continues to be the go-to industry for businesses to advertise.
Businesses in the social media landscape compete with one another on pricing and volume to command share of advertising dollars. Platforms compete for volume of users and viewership through a differentiated value proposition for users. User metrics commonly refer to daily active users (DAU), monthly active users (MAU), or subscribers. Businesses also compete for pricing for advertisers through a differentiated pricing strategy. Platforms seek to demand higher pricing through advances in marketing analytics and lucrative users with a high propensity to spend and a high conversion rate. Pricing is commonly referred as average revenue per user (ARPU) or cost per click (CPC).
The industry is highly competitive, in aspect of pricing and volume. The largest businesses in the space consist of Meta platforms which operates Facebook, Instagram, and WhatsApp, Alphabet which operates YouTube, and ByteDance which operates TikTok. Other notable players include X (formerly Twitter), LinkedIn, and Snapchat.
Reddit maintains a strong financial health profile. Balance sheet metrics show strong liquidity and solvency ratios that could handle even the deepest of business cycle downturns. The IPO in early 2024 bolstered Reddit’s balance sheet raising roughly $750m. Currently the business has no long-term debt in its capital structure. Reddit benefits from the capital light nature of a digital platform, both capital expenditures and working capital decrease relative to other expenses as the business scales. The human capital for the business is high, however as the business grows it will benefit from increased operating leverage. It is important to track dilution caused from stock-based compensation from the human capital expense. Overall, in a well-managed business operating margins can reach 40% or higher and free cash flow can grow exponentially.
Reddit’s valuation is derived from a blend of intrinsic and relative methods. The intrinsic valuation model is underpinned by strong user growth in the early stage, followed by accelerating ARPU expansion as Reddit enhances its monetization capabilities. The model incorporates a hybrid approach using both a perpetual growth method and an EBITDA exit multiple. Key assumptions include a long-term growth rate of 4.0%, a 2029 EBITDA exit multiple of 20x, and a discount rate of 9.2%. The discount rate, or WACC, is based on a deleveraged industry average beta due insufficient public share price data for Reddit. The model accounts for all dilutive securities in the share count. The relative model compares a peer group of public social media companies including Alphabet, Meta, Pinterest, and Snapchat. The model assumes a blend of a 15x 2025 EV/Revenue multiple and a 35x 2025 EV/EBITDA multiple. These multiples exceed industry metrics, reflecting Reddit’s higher expected growth in both revenue and EBITDA. Averaging all four valuation methods results in a price target of $135 per share.
Reddit faces potential serious risks to the business. Threats of artificial intelligence rendering the platform less useful, changes to the google search algorithm with drives a large portion of new organic growth, and innovation threats from other businesses that take from Reddit’s advertising market share. Although these pose potential risks to the business and viability of the platform, they also show areas for opportunity to win share from other market participants.
At the current valuation Reddit is a hold. Despite strong business prospects and organic user growth shares are appropriately valued. As Reddit continues to deliver on its strategic goals and takes market share from players in the industry, the business valuation will evolve. Reddit is a promising business with potential to dominate its market. As the market and business develop, the price target and recommendation are subject to change.
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