Reddit’s (RDDT) recently reported Q1 results have added a fresh dose of confidence to its growth story, which seems to progress well, even if the stock hasn’t fully reflected that momentum in recent months. In my view, asymmetries like this create windows of opportunity, and this looks like one of them. Reddit nailed it this past quarter, demonstrating a substantial jump in advertising revenue and clear signs of operating leverage, all backed by a rebound in daily active users.
These solid results have pushed analysts to project nearly 30% annual growth over the next five years, which helps justify Reddit’s seemingly high valuation for some.
That said, Reddit is still in the early stages of expanding its bottom line, and it has more to prove—namely, consistency and more quarters like Q1. But based on current estimates and where the stock is trading today, I see a decent margin of safety in going long, which keeps me bullish on Reddit stock.
Reddit Is On Fire Right Now
On May 1st, Reddit proved it’s gaining serious ground in digital advertising. In its Q1 results, the platform reported 61% year-over-year revenue growth, hitting $392 million—easily outpacing Meta’s (META) 16% and Snap’s (SNAP) 14% growth. That makes Reddit the clear leader in market share gains among its direct peers.
One of Reddit’s biggest strengths is its growth in U.S. daily active users (DAUs), which jumped 21% year-over-year, from 41.5 million to 50 million. That’s a big deal, because the U.S. is Reddit’s most lucrative market. The average revenue per user (ARPU) in the U.S. climbed to $6.21 (up 31% YoY), about five times higher than international ARPU at $1.34. In other words, Reddit is growing where it monetizes best.
This surge in high-value users has translated into a major boost in operating cash flow, which increased 4x to $128 million in the quarter. In other words, Reddit isn’t just growing fast—it’s turning that growth into real cash.
And they’re not done. For Q2, Reddit is guiding for continued momentum, with $420 million in revenue and $120 million in adjusted EBITDA. That’s solid sequential growth and shows confidence, especially when you compare it to Snap, which didn’t offer any guidance due to macro uncertainty.
Potential Risks to the Bullish Thesis
Reddit is growing in the most lucrative ad market—the U.S.—and shows impressive operational leverage. The company also projects continued improvement in key metrics, even as some of its peers pull back. But that doesn’t mean there aren’t questions worth asking.
First, while Reddit provides adjusted EBITDA, management has not discussed GAAP net income. In other words, Reddit is likely still unprofitable on a GAAP basis—and possibly still burning cash at the bottom line.
Although operating cash flow growth has been a significant highlight, there’s not much transparency around revenue, cost, or R&D trends. High growth can often mask rising expenses, so there may be underlying margin pressure if spending is ramping up as quickly.
Also, Reddit’s user growth is solid, but it plays in a hyper-competitive social space—Instagram, X, TikTok, Discord, and others. Keeping users engaged while ramping up monetization isn’t easy, especially for a community-driven platform where too much advertising can risk backlash.
While Reddit has clearly consolidated its presence in the U.S., it’ll be important to see how it tackles international expansion. Efforts like machine translation to drive global user growth could naturally boost the number of active advertisers and lift ARPU abroad. Success internationally will be key to reigniting bullish sentiment, especially for a stock trading at a premium multiple (around 33.7x forward earnings).
Reverse Engineering Reddit’s Discounted Cash Flow
One exercise I like to do with growth stocks like Reddit is to run a reverse DCF—estimating future cash flows based on analyst growth expectations and discounting them back to the present to see if the current price makes sense.
Following Reddit’s strong Q1 results, we’ve seen a wave of upward revisions to estimates for the next five years, ranging from a 5% increase in 2025 forecasts to about 3.5% in 2029. With that, consensus now suggests Reddit could hit $4.54 billion in revenue by 2029, starting from $1.85 billion in 2025. That implies a CAGR of 28.6%, which is quite solid.
What’s even more impressive is that analysts also expect significant operating leverage. Reddit’s EBIT margin is forecast to rise from 9.8% in 2025 to nearly 37% in 2029, averaging around 25%. That seems fair, given the apparent margin expansion we already saw in Q1—revenue grew 61%, while adjusted costs were up just 19%.
Since Reddit operates a digital platform business, it’s not very capital-intensive. Depreciation and amortization are minimal, and working capital isn’t a major driver. So, for simplicity, I’m assuming D&A fully offsets capex, that capex remains below 1% of revenue, and that working capital stays flat as a percentage of revenue.
Based on these assumptions, Reddit’s free cash flow to the firm (FCFF) at the end of 2029 could reach around $1.42 billion. Discounting that back using an 8% rate—which I think is reasonable for a scalable, asset-light business with zero debt—and assuming a 3% perpetual growth rate, Reddit’s equity value comes out to about $23.65 billion (factoring in ~$2 billion in net cash).
Assuming the share count stays stable, this would imply a fair value of around $128.50 per share, which is about 16% above current levels.
Is Reddit Stock a Buy?
There’s plenty of optimism among Wall Street analysts regarding Reddit. Of the 22 experts covering the stock, 15 are bullish, six are neutral, and only one is bearish. Analysts have set an average price target of $158.86 on RDDT stock, which implies a 50% upside from the latest share price over the coming year. Clearly, many on Wall Street still see Reddit as significantly undervalued.
Why Reddit’s Stock is Underrated
Reddit is arguably making solid progress and may become one of the fastest-growing social media platforms. In my view, the stock’s underperformance so far this year looks like an overreaction, especially given the strong growth reported in recent quarters and clear signs of continued momentum. That’s why I see a reasonable margin of safety for going long on Reddit at current levels.
For this thesis to hold, Reddit must keep delivering quarters like Q1, where growth expectations are revised higher and the story continues to strengthen. In today’s macro environment, there’s little room for error for high-growth, high-valuation stocks. However, with execution matching expectations, staying with the bullish trend becomes a no-brainer.