How Next Week’s Earnings Call Could Expose Reddit’s (RDDT) Valuation Wall

Reddit (RDDT) is currently at a fascinating point as it prepares to pull back the curtain on its Q4 results next Thursday. The platform has spent much of the last year proving to Wall Street that it is no longer just a hard-to-monetize message board, but a legitimate powerhouse in the digital ad space. However, as compelling as the growth story is, the stock is trading at levels that leave little room for error, keeping me neutral despite the obvious potential.

Ad Revenue Trends Must Translate Into Revenue

Reddit has a lot to demonstrate in next week’s report. Wall Street is looking for an impressive print, with consensus estimates calling for EPS of $0.93, a 157% year-on-year increase, on revenue of $667 million, implying another 56% increase. Given that management’s own guidance for the quarter topped out at $665 million, the market is already baking in a strong beat.

Notably, the underlying growth engine of ad revenue is purring. Specifically, Reddit’s contextual targeting, in other words, the ability to put an ad for a trekking boot inside a community of hikers, is finally paying off in a world where privacy changes have crippled other social media giants.

We are seeing a “flight to quality” among advertisers who are wary of conventional giant ad platforms like Meta Platforms (META) and Alphabet (GOOGL) and are looking for so-called “high-intent” audiences, i.e., likely buyers. User growth remains exceptionally strong, further attracting advertisers, with DAU reaching 116 million last quarter.

While there’s some talk of macro softness hitting the broader ad market, Reddit’s unique position as a “search alternative” provides a nice cushion. In addition, the platform’s recent algorithm overhaul, which significantly boosted Return on Ad Spend (ROAS), has turned it into a must-buy for small and medium-sized businesses. If they can show that international monetization is finally catching up to the U.S., we could be looking at a significant raise in 2026 guidance that could re-ignite bullish sentiment in the stock.

AI Data Licensing Emerges as a Catalyst in 2026

Beyond advertising, data licensing is likely to prove to be Reddit’s high-margin caviar. Last year, Reddit became the “digital oil” of the AI boom. As AI models risk collapsing under the weight of their own generated content, Reddit’s 18-year archive of genuine human conversation has become the most valuable resource in tech.

The beauty of these types of licensing deals, which include partnerships with the likes of Google, OpenAI, and potentially others, is that they carry nearly zero incremental costs. This is pure, high-margin revenue that flows straight to the bottom line, while also diversifying the business away from the volatile whims of the advertising cycle. It should also lead to explosive growth in Reddit’s revenue per user, which is already snowballing across all geographies.

I believe this will be a re-rating catalyst this year. As these deals scale, they provide a floor for earnings that most social media companies simply don’t have. Instead of just a “social network”, Reddit is evolving into a data-as-a-service (DaaS) business. For an investor, seeing this revenue stream grow from a curiosity into a meaningful percentage of the top line is the most bullish part of the 2026 narrative, in my view, as it effectively subsidizes the platform’s expansion into new markets and AI-integrated search features.

Earnings Growth May Struggle to Scale Valuation Cliff

Now, here is where the bullish story meets the valuation’s neutral reality. Even after the recently lagging stock price, Reddit is not what anyone would call a bargain. The stock is currently trading at a dizzying 94x this year’s expected 2025 EPS of $2.33, and a price-to-sales multiple of 19.3x on 2025’s expected revenue of $2.15 billion. Investors are now paying a massive premium compared to almost any other major player in the interactive media space.

To be fair, the bulls point to the remarkable growth momentum. Wall Street is forecasting EPS growth of 66% and revenue growth of 39% for 2026. If Reddit hits those marks and sustains growth roughly in line with these figures thereafter, it can grow into its valuation somewhat quickly. But that if is doing a lot of heavy lifting. The risks are non-trivial.

First, there is the heavy reliance on Google’s search ecosystem. A single tweak to a search algorithm can significantly impact the top-of-funnel traffic that Reddit depends on for new-user growth. Second, the AI data licensing moat may not be as wide as we think if legal challenges over fair use begin to favor developers over content owners. If any such factors revise consensus growth rates downward, the stock could take a sharp hit.

When all is said and done, if we take a data-driven approach, Reddit’s valuation looks stretched relative to its sector across nearly every major metric. On a non-GAAP basis, RDDT trades at 57.8x trailing earnings and 48.9x forward earnings, representing premiums of roughly 310% and 190% to the sector median, respectively. The gap widens further under GAAP metrics, with the stock valued at nearly 120x trailing GAAP earnings and 92x forward GAAP earnings, translating to premiums of approximately 587% and 400% versus its peers.

While RDDT’s forward non-GAAP PEG ratio of 1.13 is slightly below the sector median of 1.23, this lone bright spot does little to offset the broader picture. Overall, the valuation profile suggests RDDT is priced well ahead of its sector, leaving little margin for error and reinforcing the view that the stock is trading at levels that assume exceptional execution going forward.

Is RDDT a Buy, Sell, or Hold?

On Wall Street, Reddit stock carries a Moderate Buy consensus rating, based on 15 Buy and seven Hold ratings. No analyst rates the stock a Sell. In addition, RDDT’s average stock price target of $264.73 implies almost 24% upside potential over the next 12 months, suggesting analysts see RDDT as undervalued despite its seemingly lofty sales and earnings multiples.

See more RDDT analyst ratings

RDDT Shines as a Great Story at a Demanding Price

Reddit is undeniably one of the most exciting growth stories in today’s market. That said, despite a lineup of compelling growth catalysts, the stock appears to be priced as though the company will execute flawlessly for years on end. I’m a big fan of the long-term trajectory, but at current levels, there’s little room for error—so for now, I’m content to stay on the sidelines and wait for a valuation that offers a bit more breathing room.