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(***Note:*** *I previously did a valuation of RDDT a year ago, and based on my required rate of return of 15%, put a buy price of RDDT at $150 and below. This post is an attempt to do the valuation based on the latest information available)*
**Methodology:**
I will not be using a cash flow valuation because Reddit's profitability is lumpy and the CEO has said that DAU is the internal priority right now. Instead, i will be comparing Reddit with Meta when Meta was at the same growth stage. I will make two measurements, the Price / Sales during Meta's growth stage (from 2012 to 2017 when YoY revenue was around 50%), and during the whole stage (2012 to present). I will then find out what the analysts are estimating for revenue growth of Reddit for the next 5 years, then apply the metrics from Meta onto Reddit giving the implied share price in five years time.
This method of valuation is known as **relative valuation** where similar to real life, you buy something based on the price metrics that was purchased previously or your pay the same price metric for something similar to what you are buying.
Meta's
|Years|Meta's Revenue|YOY|Price / Sales|
|:-|:-|:-|:-|
|2012|5,089|\-|16.74|
|2013|7,872|54.69%|17.37|
|2014|12,466|58.36%|16.59|
|2015|17,928|43.82%|16.57|
|2016|27,638|54.16%|12.14|
|2017|40,653|47.09%|12.82|
|2018|55,838|37.35%|6.78|
|2019|70,697|26.61%|8.29|
|2020|85,965|21.60%|9.06|
|2021|117,929|37.18%|8.03|
|2022|116,609|\-1.12%|2.77|
|2023|134,902|15.69%|6.75|
|2024|164,501|21.94%|9.02|
|2025|200,966|22.17%|8.28|
|Meta Metric|Value|
|:-|:-|
|Average P/S Growth Stage (BULL)|15.37x|
|Average P/S Mature Stage (BEAR)|7.37x|
|Average P/S Whole (BASE)|10.80x|
I will use growth stage as the Bull case for 15.37x of Sales
The base case will be 10.80x of Sales while the bear case will be 7.37x of sales.
Now that we have the relative metrics to measure Reddit, the next step will be find out Reddit's Sales estimates for the next 5 years from analysts, and we will probably blend these estimates together..
I source the data from three websites, average it to give a blended results. The only large difference is in 2030, where the nos are 7.2bn, 7.8bn and 7.9bn. I then proceed to find out what is the sales / share for each year. Reddit has said that they intend to buy back shares to overcome the effects of dilution due to SBC. In the last 1 year, dilution has been 0.6%. I will use 2% as i think is appropriate.
|Year|2025 Actuals|2026|2027|2028|2029|2030|
|:-|:-|:-|:-|:-|:-|:-|
|from SA|2202.50|3230|4260|5330|6350|7810|
|from MSNR|2202.50|3288|4346|5432|6654|7985|
|from DCF|2202.50|3225|4248|5321|5942|7198|
|Blended|2202.50|3248|4285|5361|6315|7664|
|Shares Outstanding|190.89|194.71|198.60|202.57|206.63|210.76|
|Sales / share|11.54|16.68|21.57|26.46|30.56|36.37|
Dividing the sales by the outstanding shares at 2% dilution, i get a sales per share of 36.37 at the end of 2030, in five year's time.
So with this 36.37 sales/share, we can multiply it with the three Price /Sales metrics above giving us three possible scenarios:
|Scenarios|Implied Share price in 5 year's time|CAGR from today's Price|Buy price at 15% IRR|
|:-|:-|:-|:-|
|Bull Case 15.37x|559.00|26.15%|279.50|
|Base Case 10.80x|392.77|17.55%|196.39|
|Bear Case 7.37x|268.10|8.91%|134.05|
When i worked on this last year, the bull case was similar at around 10x, and the implied share price by 2030 end was around $300, today, that implied share price is now almost 400. If i were to buy it today, one could reasonably expect a share price appreciation of around 17.55% a year for the next 5 years. The other way to look at this is if your expectation of gains is around 15% a year, then the price should be around of lower than $196.39
**TLDR:** Buy below $196 to get a IRR of 15% a year. Morningstar has a fair value price of $200.