▶ Полный текст поста
A lot is happening in Reddit’s world recently. A lot of noise and speculation about its dependence on Google, etc. There have been a lot of Bull and Bear arguments floating around. The stock price has been a roller coaster recently, and it is **down \~35% YTD.** The stock price fluctuates wildly, but the underlying business does not.
One thing I learned as an investor is to spend too much time forecasting companies and less time forecasting industries and how the industry economics will change overtime. Like most investors, I was obsessed over Revenue growth, ROIC, FCF conversion, EPS, PE, etc. I am not saying they are not important, but every investor looks at the same numbers and with AI synthesizing information in seconds there is no edge there.
**The better question** is will this industry economics look the same in the next 10 years even if the technology changes around it. What this helps me during valuation is not just if the revenue and margins will grow in the next few years, but can they keep growing if the industry economics shift underneath them.
**Why this is important**: Because when consumer behavior, industry economics change, the current models will stop working. Zooming out of the numbers and thinking through what will happen if technology and industry change will help look beyond what numbers can explain and better understand your investment can grow long-term. Additionally, will provide conviction to hold/buy more when the market eventually punishes the company for some changes in the industry.
In this article, I will try my best to remove noise and focus on Reddit’s business, growth potential, moat, and Valuation/how much growth is currently priced in. Also, I will briefly discuss why I waited almost a couple of years since the IPO to invest and the valuation.
# Business Model
Most of us know what Reddit does, so I will not spend a lot of time on this. Reddit is a digital community platform where people with similar interests can have authentic conversations, explore passions, and exchange ideas. Communities on Reddit are organized based on specific interests and are called subreddits. Within subreddits, Redditors engage in active and in-depth conversations by sharing experiences, submitting links, uploading images and videos, and replying to one another in comment threads on any topic.
Community topics are very broad, such as “r/pottery”, “r/cancer group”, “r/fifa2026”, “r/sleeptraining”. Everyone can find their topic of interest and connect and learn with a diverse group of people.
# Reddit is the 6th most-visited website in the world!
Yes - you read it right: 6th most visited site. I did not believe it when I first read that. In this age, where content is synthesized by AI and models, Reddit offers genuine conversations by real humans who have no incentive to lie. For anyone looking to get honest feedback on products, health, school, international trips, and the list goes on… Reddit is the place to go.
# “How do they make money”?
Similar to other social media platforms, they do not charge their users to use the platform but make money from advertisements on their platform.
How does advertising work:
Advertising is charged by impressions, clicks, or, in some cases, actual conversion.
* **CPM (Cost Per Mille / 1,000 impressions):** advertisers pay for every 1,000 times (Mille = 1,000) an ad is shown
* **CPC (Cost Per Click):** advertisers pay each time someone clicks on the ad
* **CPA (Cost Per Acquisition):** advertisers pay only when a specific action happens (install, signup, purchase, etc.)
The main models are quite simple. **CPM** means paying for impressions; **CPC** means paying when somebody clicks, and **CPA** is more performance-based and depends on an actual action such as an install, registration, or purchase.
The difference matters because an advertisement does not necessarily need to convert users immediately into purchasing something. Sometimes just putting the impressions in front of the right person is very valuable. In advertising, there are various things that companies are looking for:
* Brand Awareness/ Brand Exposure
* Lead Generation: Users click on the link and land on their website, so they’ll purchase something
* Engagement
* Traffic
* Conversion: Users purchasing their product
# Moat:
# “Reddit is the most human place on the internet.”
# How is Reddit being different from competitors?
This is where I think Reddit is most unique in the industry. The audience are massive but more importantly they are already separated themselves into very specific communities. Remember I mentioned above that Reddit users use channels such as r/marriage, r/games, r/pickleball, r/lulufanatics etc. so Reddit can sell advertisers to show the impressions in the specific group where the users are coming to look for something new or share their experience.
For example, r/lulufanatics has over 60K members in it. So Lululemon or other athletic companies can choose to show their advertisements (look at the screenshot above) where users are already looking for it instead of posting it in r/cement or r/construction. So, ROI is higher compared to traditional TV or other social media companies. Advertisers can be strategic and place the advertisements in relevant groups.
Reddit has more than 130 M Daily Active Users (DAU) based on their latest quarterly report, and they have over 22 billion comments as of the end of last year.
Let’s just talk about what this means:
* They have 20B+ comments from real people
* Who are already separated into communities
* Reddit has real-time information on how people are reacting to various things and uses that for:
* Advertising and selling impressions at higher rates
* Use that information to sell it to companies
* And tons of DATA!
# Inflection Point: Finally becoming profitable after 20 years of losses
Reddit has reached an important inflection point: after nearly 20 years of losses, it is finally becoming a profitable and increasingly valuable platform. I think it is primarily driven by:
1. Rapid user growth: Reaching 130M+ DAU’s
2. Reddit’s unique position on the internet: It is organized around **communities,** and dissatisfaction with increasingly commercialized/algorithm-driven platforms is pushing some users toward Reddit.
3. Better advertising monetization
4. AI companies paying for valuable Human Data
# Risks:
Here are the major risks for Reddit
**Web Search Traffic (AKA Google)**: Currently, it is estimated about 30%-50% of Reddit traffic comes from Google search traffic. That is HUGE, if you ask me and it is a big threat to Reddit. At the same time, I want us to remember that it is a two-way streak.
Without Reddit providing its database, Google AI overview will be subpar for people looking to hear from other’s experiences.
For example: AI overview is trash when you are looking for some medical issues or when you are looking for specific things to do in certain cities while travelling, etc.
At the same time, Reddit have to spend a lot more on S&M to grow their users, increase visits to website/download their app. I think Reddit can get create here to slowly drive traffic to app to get the full experience. Similar to how “X (twitter)” & “Instagram” forces users to download the app to see the video or responses to a post. Reddit can do something similar. Of course, that has to be very strategic push appropriately, so people get genuine value from downloading the app.
**Monetization**: Reddit users base is intensely anti-corporate and protective of data privacy. So, Reddit is walking on a tight rope and make sure they are not aggressively advertising and not implement un-skippable ads will be a risk of user’s frustration and eventually leave the platform. Reddit has to get creative, which I feel they are already doing it, is by working with companies to create advertisements that look like part of the responses. Similar to how TikTok makes video advertisements made by regular people, so you do not feel like you are watching an advertisement. Reddit should follow similar playbook.
**Macro Softness**: This is overall industry risk, but during recessions, advertisement budgets tend to go down significantly, and Reddit’s revenue will have an huge impact
# Financials:
# Revenue Growth:
Revenue growth exploded in recent years with a CAGR of 63%, and the growth is expected to slow down in the coming years. Reddit has been beating the estimates every quarter since its IPO, and we hope that will continue in the near future.
Revenue is growing at a faster pace than user growth. The growth is primarily driven by the high quality of monetization: **Scaling Ad impressions and Command's premium Ad pricing.**
**Premium Ad pricing**: The main goal for companies that are paying for their advertisements is to sell their product or service. In most cases, companies will pay for the advertisements up to the price where their ROI is positive and the LTV: CAC ratio is >1 (ideally 3 for mature companies). And Reddit has the information on how many impressions are converting to clicks and keeps improving its algorithms to provide better value to the users on both sides of the platform.
# Margins:
**Gross Margin** for Reddit is **>91%+!** It is exceptionally high because of a few things:
* **Free Product Creation**: They do not need billions of dollars to create content. Companies like Netflix need billions of dollars for their content creation vs almost $0 for Reddit.
* **Crowrd sourced**: Reddit does not need thousands of content creators. Everything is crowd sourced inputs for free
* **Software Scalability**: Because the content creation and community management costs are practically zero to expand. Any additional Ad revenue or data licensing deals will directly go down to the bottom line.
**Net Profit Margin**: Increased drastically since IPO and it will increase with the growth in revenue. They only need marginal additional costs to maintain additional growth.
I expect R&D & Sales/Marketing (S&M) expenses to grow in the near future to improve product for users and for advertisers, to make improvements to the App etc. Similar with S&M expense, as the company gets bigger the cost of acquiring (CAC) new people increases. But SG&A grows at a moderate pace.
**Capital Allocation:**
**Reddit** is low CAPEX business, which is great. They only invested <$5M in Capex last quarter and their ROIC is over 150%!
# Valuation & My advice on Buy/Hold/Sell:
Before jumping into valuation, I want to provide how efficient [RDDT 0.46%↑](https://substack.com/search/%24RDDT) in cash conversion. Since IPO, **FCF grew over 100% every quarter**
Reddit has been achieving:
* **FCF conversion from net income above 100%**
* **FCF margin near or above 30%**
# My Verdict:
# Conclusion: BUY
I prefer to use 2 methods to understand the valuation of a company
* **Earnings Growth Model** \- I heard this from John Huber, and I think one of the best ways to look at it
* **Reverse DCF** \- Helps me understand how much growth is already priced into the current price
# Earnings Growth Model:
**Expected return** = Earnings growth + Shareholder Yield +/- PE Expansion
**Earnings Growth**\- 20% over the next 10 years. I am being very conservative here, understanding there is risks.
**Shareholder yield**\- 1% (0% Div. yield + 1% annual share buyback)
PE Multiple Expansion- Forward PE might grow from the current 37X to 25X.
**Expected Annual Return**: 20% + 1% +0.1\*((37-25)/25)= **18%**
***The Expected annual Return of 18% is good. It is above the 10% threshold I want to see.***
# Reverse DCF:
We use the Reverse DCF analysis to understand growth rates that are already baked into the current stock price.
**Inputs:**
* Current FCF: $1,019 M (LTM) Adjust the ***expected growth in years 1-10*** to figure out what growth rate the current stock price matches the Intrinsic Value/Share.
* Discount Rate: The minimum expected return as an investor.
At the current stock price of ***$155*** as of 08/26/26, the FCF should grow at an annual growth rate of around**14%** to return **10%** (discount rate used in the calculation) to the shareholders. The expected growth rate is **over 30%** for the next few years and may be slow down after that. I think this gives a huge Margin of safety at this price levels. As any company we own, we have keep learning more about the industry and company to make the fundamentals stay intact.
**My Expected price target is \~$260-$275; which is \~70%-75% above current price.**
**My approach/How I came up with that price range:**
I am being slightly conservative here. I am assuming the company will grow \~25% on average for the next 5 years and then starts decelerating growth by 2% annually. By Year 10 the growth rate will drop to 15%.
And after year 10 the terminal growth rate is 3%. This give me a value of **\~$260**. Which is **\~70%+** below current price.
**My overall verdict**: Reddit is a great company in the making. There is a long runway for the company along with some big risks. I am confident the company will come out on the other side successfully by navigating Google, app downloads, Ad revenue growth etc.