u/ajkomajko ·
Reddit — r/ValueInvesting
· May 04, 2026 at 16:35
· ⬆ 23 pts
· 💬 10 comments
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Summary
Author argues Reddit (RDDT) is structurally mispriced: Q1 2026 EPS of $1.01 beat Q1 2027 consensus of $0.98, while consensus underestimates incremental net income margins (65.7% vs. analysts’ ~30%).
Catalysts include a favorable Anthropic ruling likely leading to licensing/settlement deals, S&P 500 eligibility, and improving DAU trends after app install pop-ups.
Post is a follow-up to prior detailed DD; author explicitly states “I’m very long Reddit.”
Quality assessment: High-quality, data-driven DD with specific EPS, margin, and catalyst analysis. Well-reasoned and actionable.
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Comments10
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Quick update following Q1 and ahead of Q2 earnings:
**EPS:** Q1 2026 EPS came in at USD 1.01. Consensus was USD 0.62. Consensus for Q1 *2027* is USD 0.98 - so Reddit just posted a number above what the analysts expect 12 months out, in a quarter with no one-offs. 2026 net income consensus has been revised from USD 871m to USD 1,014m in the past 3 days, but it's still mispriced.
**The biggest flaw in consensus:** margins. Q1 2026 incremental net income margin was 65.7%, up from 45.5% in Q2 2025. Tax-adjusted floor is around 50% once NOLs run out. Analysts have net income margin stagnating at \~30% - basically at current level - and incremental margin compressing to 35.8% by 2028. Hard to see why - the platform is built, gross margin is 91%, moderators are free labour, Q1 capex was USD 1m. There's no mechanical reason margins compress as revenue scales.
**Catalysts:** the Anthropic ruling found Reddit's claims "qualitatively different from a copyright claim" - fair use isn't a defense to a Terms of Service breach. Settlement plus licensing deal looks probable ahead of Anthropic's IPO, and it sets precedent for the pending Perplexity suit and the Google/OpenAI renewals in H1 2027. S&P 500 inclusion criteria still met. The US DAUq stagnation scare is probably ending - install pop-ups have pushed iOS App Store rank from #162 to #78 in the US over the past 2 weeks (UK #180 to #85, DE #194 to #144).
Worth noting Q2 2026 is the last quarter Reddit reports the logged-in/logged-out DAUq split. Convenient timing to surprise on the metric just before discontinuing it. In any case the split is irrelevant as per my previous posts.
As you can imagine - I'm very long Reddit. Check my previous posts for more detailed DD.
Q1 2026 EPS of $1.01 vs consensus $0.62 and above Q1 2027 consensus of $0.98; incremental net income margin hit 65.7% vs analysts’ modeled ~30% stagnation. Analysts are structurally underestimating margin expansion as revenue scales with minimal incremental cost (91% gross margin, $1M capex, free labor). This mismatch creates a multi-year earnings beat cycle. Long RDDT on underestimated earnings power and multiple catalysts (Anthropic settlement, S&P 500 inclusion, improving DAU trends). Upside to consensus estimates likely continues. NOL expiration raises tax-adjusted floor to ~50% margin; DAU growth stalls; legal/regulatory setbacks; tech sell-off.