Introduction
Over the past 6 months, RDDT has declined by more than 25% amid fears of AI disruption in the software sector. While I am normally more cautious about fast-growing companies at high multiples, the Reddit stock price simply seems to be too low at the current fundamentals, especially considering the high brand recognition and strong community network, combined with future growth possibilities.
Fundamentals
Judging from Reddit's most recent earnings report (Q1 2026), the company is growing rapidly with YoY revenue growth of almost 69%. Moreover, growth seems to be increasing at rates of roughly 20%-40% for 2022 and 2023, as well as 61.7% for 2024. Furthermore, the gross profit margin is also increasing from 76% in 2020 to a new high of 91.4% as of this quarter. Additionally, RDDT became profitable this year, reporting a positive EPS of 3.74. While investors have been diluted in the past, this also seems to be over with the company's Q1 2026 results showing a decline in diluted weighted average shares outstanding.
Looking at the balance sheet, RDDT has almost no debt, with equity almost being 100 times as high as liabilities, while cash is 130 times as high. This makes RDDT a high growth company that shows no sign of declining growth numbers, without the risks that such companies normally face, as it has little enough debt to not need additional capital and can even afford to buy back stock instead of diluting shareholders. Moreover, the fact that Reddit has shown that it can transform revenue into earnings (and that at a margin of over 90%), makes it one of the highest quality companies I have seen over the past few months.
Valuation-wise, using a 57% revenue growth rate (average of the past 5 years) over the next 5 years and a discount rate of 10% (which is high given that the company has almost no debt), one gets a fair value of $261.5 or an upside potential of 49.5%. Moreover, the currently high-looking P/E ratio of 50 would be below 11 if growth continues at this rate over the next 3 years, without even considering the company's potential share repurchases.
Assessing the AI risk
The reason for the rather low valuation are fears of increased competition due to AI. While this is indeed a valid concern, it will be hard for other players to enter the market in the short- to medium-term. Reddit spends $560 million a year on marketing, as well as $275 million on administration and almost $800 million on research and development. This only leaves competition from big players that can afford those spending or that are already established, like Meta, TikTok, and YouTube. Meta is especially important as a competitor, as the company plans to use AI in the advertising sector. While this could put pressure on Reddit's margins, the company has previously been in a situation in which it was comparatively small, with competitors such as Meta having many advantages. Despite this, RDDT managed to deliver gross margins above 70%. Moreover, users come to Reddit to have conversations with humans, which is becoming rarer with the rise of AI and AI-generated posts on social media platforms such as Facebook, Instagram, and LinkedIn. Considering the RDDT has built most of its brand around this concept, it is unlikely that users will abandon the website at a time when generic posts on other websites are more and more the norm. Furthermore, the authenticity of conversation makes Reddit's data more valuable for training AI than that of competitors, proving another advantage of AI for the company.
Another concern is that Google algorithm changes might be a threat to RDDT, as most of the traffic comes from Google searches. While this is definitely a reason for concern, it should be considered that even when using AI, it often refers to Reddit as a source, creating additional traffic. Given the former point of the increased value of Reddit's data, we might even see Reddit more often as a source, especially when asking AI about people's opinions, making this a risk, but also an opportunity. This is also reflected in the RDDT's daily user growth of 17% shown in the graph below, indicating the company is on track to increase its user base. Furthermore, Morningstar notices that the Google algorithm did not have an impact in the Q4 2025 quarter, meaning that the previously reported 19% DAU growth comes from increased retention and onboarding improvements. Moreover, Morningstar argues that Reddit has a lot of potential to increase monetization by increasing the amount of ads as well as improving ad targeting. All of this could definitely make up for any growth losses that might happen through algorithm shifts by Google.
Valuation
In my valuation, I will continue using a 10% discount rate to be rather conservative. Moreover, I assume a 5-year revenue growth rate of 50%, assuming slightly lower growth than the current 70%, despite all the chances for increased monetization. After that, I assume RDDT only grows by 2.5 until infinity. Additionally, I assume profit margins to only be 70%, even lower than during 2020, to estimate the risk of margin pressure by other big tech companies. All of this results in a fair value of $213 per share, still a 22% upside potential despite using rather conservative estimates and assuming that the company's problems start right now. This, in 3 years, would be a P/E ratio of less than 10 for a company with revenue growth of 50%.
Conclusion
In total, RDDT looks very cheap at the moment. This especially holds given the strong margin of safety investors have, as even lower margins and growth rates are still acceptable at this valuation.
