3 Reasons Investors Love Reddit (RDDT)

What a fantastic six months it’s been for Reddit. Shares of the company have skyrocketed 54.3%, hitting $225.69. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now still a good time to buy RDDT? Or are investors being too optimistic? Find out in our full research report, it’s free.

Why Is Reddit 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. Domestic Daily Active Visitors 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 32.3% annually to 51.6 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.

2. Outstanding Long-Term EPS Growth

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Reddit’s full-year EPS flipped from negative to positive over the last three 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 41.8 percentage points over the last few years. This is encouraging because it gives the company more optionality. Reddit’s free cash flow margin for the trailing 12 months was 26.8%.

Final Judgment

These are just a few reasons why we think Reddit is an elite consumer internet company, and after the recent surge, the stock trades at 40.5× forward EV/EBITDA (or $225.69 per share). Is now a good time to buy despite the apparent froth? See for yourself in our in-depth research report, it’s free.

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