Reddit: Major Concerns Over Valuation and Growth Challenges

Summary

• Reddit's stock has surged dramatically following strong Q3 results, but its valuation is now stretched and hard to justify.

• Revenue grew 68% year-over-year to $348.4 million, driven by robust daily active unique (DAUq) growth and higher engagement, but challenges in international markets could limit further growth.

• Despite impressive metrics like DAUq reaching 97.2 million and ARPU at $3.58, international ARPU lags far behind domestic levels, and regulatory hurdles add complexity.

• Reddit's premium valuation relies heavily on momentum, leaving the stock vulnerable to significant declines if growth slows.

Since reporting its Q3 results, Reddit has experienced a remarkable surge in its stock price, doubling over the past two months. While the results themselves were strong, investor enthusiasm has propelled the stock to levels that no longer seem grounded in valuation metrics. Reddit has become one of the leading social media platforms globally, leveraging its unique structure of subreddits to foster engaged communities. However, the recent rally raises concerns that the stock is overvalued, and even another strong year of growth in 2025 might not justify its current price. While Reddit remains a promising long-term investment, the short-term risks associated with its valuation are significant.

Reddit’s financial performance in Q3 was undeniably impressive. Revenue grew by 68% year-over-year, reaching $348.4 million, while adjusted EBITDA came in at $94.1 million, representing a healthy margin of 27%. Daily active unique users (DAUq) surged to an all-time high of 97.2 million, marking a 47% year-over-year increase. Reddit also reported that it surpassed 100 million DAUq on several days during the quarter, showcasing its ability to scale and attract users. Weekly active unique users (WAUq) grew even faster, rising 53% year-over-year to 365.4 million.

The company’s strongest market remains the United States, where DAUq growth continues to outpace international expansion. Domestic success highlights Reddit's strong traction in its core market, but it also underscores the challenges of maintaining growth as the U.S. market becomes saturated. To sustain its trajectory, Reddit must expand further into international markets, which will require significant investments in technology, marketing, and regulatory compliance. International markets present unique challenges, such as stricter data privacy regulations and lower advertising revenue potential compared to the U.S.

Another key driver of Reddit’s financial success is its average revenue per user (ARPU). In Q3, ARPU rose to $3.58, a 14% year-over-year increase. However, the gap between U.S. and international ARPU remains stark. Domestic ARPU was $5.88, compared to just $1.32 for international markets, highlighting the difficulties in monetizing users outside the U.S. These disparities suggest that Reddit’s international expansion will face headwinds in achieving profitability at the same level as its domestic operations. Seasonality also plays a role, with ARPU typically higher in the third and fourth quarters of the year.

Reddit’s reliance on advertising revenue, which accounts for over 90% of its total income, underscores the platform’s dependence on user engagement and impressions. Advertising revenue grew 56% year-over-year, driven by increases in ad impressions, higher user growth, and more efficient ad placements. However, international advertising revenue remains significantly lower than domestic levels, presenting another challenge for long-term growth.

While Reddit has made strides in diversifying its revenue streams, the “Other” category, which includes data licensing, remains a small fraction of its total income. This segment grew 547% year-over-year in Q3, reflecting the company’s efforts to capitalize on the potential of social media data for AI applications. However, this opportunity is fraught with risks. User-generated content, which forms the backbone of Reddit’s platform, is often unstructured and prone to misinformation, making it less valuable for AI training compared to more controlled data sources.

The company’s valuation has reached a level that is difficult to justify, even with its robust growth metrics. Reddit currently has a market capitalization of approximately $29 billion and an enterprise value of $27.25 billion after accounting for its cash reserves. Analysts expect revenue to grow 34% in 2025 to $1.71 billion, but even under bullish assumptions—such as $2 billion in 2025 revenue and 30% growth in 2026—Reddit would still trade at a lofty enterprise value-to-revenue multiple of 10.5x. This is significantly higher than any of its peers, none of which trade above 10x revenue on a 2025 basis.

The risks associated with Reddit’s valuation are compounded by its reliance on momentum trading. Any signs of slowing growth, whether through weaker-than-expected quarterly results or a guidance miss, could trigger a sharp re-rating of the stock. This makes Reddit a risky bet for investors at its current levels, despite its impressive operational performance.

In conclusion, Reddit’s stock has benefited from a wave of investor enthusiasm following its strong Q3 results, but its current valuation leaves little room for error. While the company is well-positioned as a leading social media platform with strong growth potential, the challenges of international expansion, regulatory hurdles, and lower monetization rates in foreign markets suggest that its growth may slow in the coming years. For now, investors might want to consider taking profits and waiting for a more attractive entry point.