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SUMMARY
Parkev Tatevosian, CFA, provides a detailed discounted cash flow valuation of Reddit stock, examining its recent price performance and future cash flow projections. He concludes that Reddit is currently undervalued even after accounting for heightened market risks and a margin of safety.
MAIN POINTS
- Reddit stock has declined 38% year-to-date in 2026, prompting questions about its valuation.
- The discounted cash flow model is introduced, emphasizing the importance of discounting future cash flows due to risk and time value of money.
- Reddit's projected free cash flow is forecasted to grow from $1.21 billion in 2026 to $7.5 billion by 2034, driven by advertising and data sales.
- A weighted average cost of capital of 13.8% is applied, with a beta of 1.55 and a risk-free rate of 4.5% reflecting current market conditions.
- Global risk factors, including wars and tariffs, justify a higher market risk premium of 6% in the valuation.
- The intrinsic value per share is calculated at $196.41, significantly above the current market price of $143.40, indicating Reddit is undervalued.
DETAILED ANALYSIS
Reddit's stock performance in 2026 has been marked by significant volatility, with a 38% decline year-to-date and most losses occurring earlier in the year. After reaching a low of $131 per share in February, the stock has stabilized around $144. The analysis centers on a discounted cash flow (DCF) approach, which estimates the present value of Reddit's future free cash flows.
This method requires selecting an appropriate discount rate, reflecting both the risk of future cash flows and the time value of money. While discount rate selection can vary among investors, the model here uses a weighted average cost of capital (WACC) of 13.8%, incorporating an after-tax cost of debt of 6.75% and a cost of equity derived from the capital asset pricing model (CAPM). The CAPM inputs include a risk-free rate of 4.5%, a market risk premium of 6%, and a beta of 1.55, the latter indicating Reddit's higher volatility relative to the broader market.
Reddit's business model is highlighted as particularly lucrative among social media companies, as it does not pay for user-generated content but monetizes it through advertising and, more recently, by selling data to companies developing large language models for artificial intelligence. The company's free cash flow is projected to grow rapidly, from $1.21 billion in 2026 to $3.25 billion by 2030 and $7.5 billion by 2034. Despite being the smallest among major social media platforms, Reddit is noted as the fastest-growing.
The analysis also considers the current global economic environment, citing ongoing wars, tariffs, and geopolitical tensions as reasons for applying a higher market risk premium. After calculating the present value of future cash flows and dividing by the number of shares outstanding, the intrinsic value per share is estimated at $196.41. This figure significantly exceeds the current market price of $143.40, even after applying a 10% margin of safety, leading to the conclusion that Reddit stock is undervalued under these assumptions.
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