Can Reddit (RDDT) Still Look Expensive After Its 34% Fall?

Reddit has seen its share price fall 33.9% year to date, even as its advertising story keeps evolving, which raises a straightforward question for investors who care about fundamentals. Is the earnings power of the business strong enough to support where the stock trades today?

• The 33.9% decline year to date puts earnings under the spotlight because a weaker share price can signal that investors are rethinking how durable Reddit's profit potential might be.
• New advertising partnerships and agency feedback that Reddit is capturing a larger slice of digital ad budgets may support expectations for future revenue and the path to stronger earnings over time.
• There is a second opinion on Reddit worth weighing. See what analysts think Reddit's shares could be worth.

The stock's next move may depend on whether Reddit's current price can be squared with the earnings the business is generating and is reasonably expected to produce.

If you are weighing Reddit against other opportunities where earnings power is the focus, a targeted screen of 28 high quality undervalued stocks can be a useful next step in your research.

Is Reddit Getting Expensive on Earnings?

P/E fits Reddit because earnings now provide a clearer anchor for what investors are paying for the business. On this measure, the stock trades on a P/E of 35.3x, compared with an industry average of about 11.1x for Interactive Media and Services and a peer group average near 30.2x. That is a rich earnings tag in absolute terms, and it also represents a premium to many other listed platforms in the space.

The fair ratio model, which looks at factors such as growth, profitability, risk and size, points to a lower P/E as more aligned with Reddit's current profile, so the present 35.3x screens as overvalued on this framework. Because recent advertiser wins and partnerships like the Zefr deal are already well known, the elevated multiple suggests these positives are at least partly reflected in the price. Explore the numbers behind Reddit's P/E valuation.

The Reddit Narrative: What Would Justify Today's Price?

Reddit's valuation puzzle sets up the role of Simply Wall St Narratives. These are structured scenarios on the Community page that spell out what growth, margins and earnings would need to look like for the current share price to appear stretched or supported. Each scenario links its number to a concrete view of how Reddit's trajectory and risk profile could change, which you can revisit as fresh information comes through.

Reddit’s community is split between investors who see a steep discount and others who think expectations still run too hot.

Bull case: 62% undervalued

"Reddit is trading 67.8% below my certified fair value, that is not a green light, it is a case to work..."

Discover why this Narrative puts Reddit at 62% undervalued.

Bear case: 19% overvalued

"As digital ad budgets increasingly consolidate around proven closed ecosystems like Google, Meta, and Amazon, Reddit faces long term pressure on advertising revenue..."

Explore why this Narrative puts Reddit at 19% overvalued.

One big Reddit question is still on the table

Everything so far has focused on what Reddit looks like today, yet analyst models sketch out where earnings and cash flows might sit a few years from now and give you one more benchmark to compare with the current share price. Explore where analysts expect Reddit to be in a few years.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com