Key Points
Reddit (NYSE: RDDT) is one of the most visited websites in the world. And its focused subreddits can make it incredibly easy for advertisers to target specific types of users, without having to track them via cookies. If someone’s on a particular subreddit, that’s a good indicator that they are interested in that particular topic.
The monetization opportunities are massive for Reddit and the company has been producing some fantastic growth. In return, investors have rewarded it with a skyrocketing valuation. In just the past 12 months, Reddit’s stock has soared by more than 260% (returns as of Sept. 29), propelling it to a market cap of $45 billion.
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But has it risen too fast too quickly and is it too late to invest in Reddit? Or can this still make for a great growth stock to add to your portfolio today?
Image source: Getty Images.
Reddit’s fundamentals look terrific
Not only has Reddit been generating strong revenue and user growth, but its margins and overall earnings have also looked incredibly impressive. In its most recent quarter, which ended on June 30, its revenue rose by 78%, totaling $500 million. And its daily active unique visitors increased by 21% to 110.4 million. Its strong gross profit margin was just under 91% of revenue, which enabled the business to post a solid profit margin of around 18%.
The company’s excellent margins could make it easy for the business to grow its bottom line in the future, which could be crucial for the stock to continue rising in value. That’s because while its valuation may rise higher, it can still be cheap with respect to earnings. Currently, however, its price-to-earnings (P/E) multiple doesn’t look all that low, and that could scare off investors who are worried about inflated valuations in the market right now.
The stock is trading at more than 100 times its trailing earnings
The risk with investing in a fast-growing stock is that you often need to pay a significant premium for it, and Reddit is no exception. Right now, its P/E multiple is over 100, and that’s steep when you compare it to other social media stocks such as Meta Platforms and Pinterest, which trade at multiples of 27 and 12, respectively.
When you’re paying such a high multiple for a stock, that leaves little to no margin of safety should it encounter headwinds that slow down its growth. And if that happens, that could lead to a sharp sell-off. Although there is a lot of enthusiasm around Reddit’s stock, the consensus analyst price target is around $202, which suggests there is a downside risk of 17% from where it trades today. Analyst price targets are by no means a definitive guide of where a stock is headed, but they can be useful in gauging just how overpriced or undervalued a stock is. And when you combine that downside risk with the extremely high P/E multiple at which Reddit trades, a strong case can be made that the stock is indeed wildly overpriced.
Is Reddit’s stock worth buying?
I really like Reddit’s stock but not at its current valuation. It has proven to be a highly volatile stock to own this year. It fell to around $80 when reciprocal tariffs were announced in April, which sent the overall market into a tailspin. With the economy still not looking all that strong and question marks about where it’s headed, my concern is that Reddit could be due for another sizable correction in the not-too-distant future.
If, however, you’re planning to invest for the long haul and are looking to hold onto the stock for at least five years, then Reddit can still be a good buy as its site has a lot of value for marketers and its growth potential looks promising in international markets. But in the short term, you should brace for the possibility of a correction.
Should you invest $1,000 in Reddit right now?
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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