What a fantastic six months it’s been for Reddit. Shares of the company have skyrocketed 118%, hitting $130.19. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Following the strength, is RDDT a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Is RDDT a Good Business?
Founded in 2005 by two University of Virginia roommates, Reddit (NYSE:RDDT) facilitates user-generated content across niche communities (called subreddits) that discuss anything from stocks to dating and memes.
1. Users Skyrocket, Fueling Growth Opportunities
As a social network, Reddit generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.
Over the last two years, Reddit’s domestic daily active visitors, a key performance metric for the company, increased by 28.5% annually to 48.2 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its popularity is exploding.
2. Long-Term EPS Growth Is Outstanding
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Reddit’s full-year EPS flipped from negative to positive over the last two years. This is a good sign and shows it’s at an inflection point.
3. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Reddit’s margin expanded by 33.7 percentage points over the last four years. The company’s improvement shows it’s heading in the right direction, and because its free cash flow profitability rose more than its operating profitability, continued increases could signal it’s becoming a less capital-intensive business. Reddit’s free cash flow margin for the trailing 12 months was 9.3%.
Final Judgment
These are just a few reasons Reddit is a high-quality business worth owning, and after the recent rally, the stock trades at 88.8x forward EV-to-EBITDA (or $130.19 per share). Is now a good time to buy some shares? See for yourself in our full research report, it’s free.
Stocks We Would Buy Instead of Reddit
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