RDDT Leaps 40% In One Month, Should You Buy The Stock Despite Its High Valuation?
We believe there is not much to fear in RDDT stock given its overall Very Strong operating performance and financial condition. Hence, despite its Very High valuation, the stock appears Attractive but Volatile. Here is our multi-factor assessment.
| CONCLUSION | |
|---|---|
| What you pay: | |
| Valuation | Very High |
| What you get: | |
| Growth | Very Strong |
| Profitability | Moderate |
| Financial Stability | Very Strong |
| Downturn Resilience | N/A |
| Operating Performance | Very Strong |
| Stock Opinion | Attractive but Volatile |
But no matter how attractive, investing in a single stock carries high risk. Trefis High Quality Portfolio and is designed to reduce stock-specific risk while giving upside exposure
Let’s get into details of each of the assessed factors but before that, for quick background: With $42 Bil in market cap, Reddit offers a global platform for authentic conversations, learning, exploring passions, exchanging goods, creating communities, and fostering belonging among diverse users worldwide.
[1] Valuation Looks Very High
| RDDT | S&P 500 | |
|---|---|---|
| Price-to-Sales Ratio | 25.0 | 3.3 |
| Price-to-Earnings Ratio | 192.8 | 24.2 |
| Price-to-Free Cash Flow Ratio | 105.1 | 21.5 |
This table highlights how RDDT is valued vs broader market. For more details see: RDDT Valuation Ratios
[2] Growth Is Very Strong
- Reddit has seen its top line grow at an average rate of 42.6% over the last 3 years
- Its revenues have grown 70% from $981 Mil to $1.7 Bil in the last 12 months
- Also, its quarterly revenues grew 77.7% to $500 Mil in the most recent quarter from $281 Mil a year ago.
| RDDT | S&P 500 | |
|---|---|---|
| 3-Year Average | 42.6% | 5.4% |
| Latest Twelve Months* | 70.0% | 5.1% |
| Most Recent Quarter (YoY)* | 77.7% | 6.1% |
This table highlights how RDDT is growing vs broader market. For more details see: RDDT Revenue Comparison
[3] Profitability Appears Moderate
- RDDT last 12 month operating income was $131 Mil representing operating margin of 7.9%
- With cash flow margin of 24.0%, it generated nearly $401 Mil in operating cash flow over this period
- For the same period, RDDT generated nearly $216 Mil in net income, suggesting net margin of about 13.0%
| RDDT | S&P 500 | |
|---|---|---|
| Current Operating Margin | 7.9% | 18.7% |
| Current OCF Margin | 24.0% | 20.2% |
| Current Net Income Margin | 13.0% | 12.8% |
This table highlights how RDDT profitability vs broader market. For more details see: RDDT Operating Income Comparison
[4] Financial Stability Looks Very Strong
- RDDT Debt was $25 Mil at the end of the most recent quarter, while its current Market Cap is $42 Bil. This implies Debt-to-Equity Ratio of 0.06%
- RDDT Cash (including cash equivalents) makes up $2.1 Bil of $2.6 Bil in total Assets. This yields a Cash-to-Assets Ratio of 78.3%
| RDDT | S&P 500 | |
|---|---|---|
| Current Debt-to-Equity Ratio | 0.1% | 20.2% |
| Current Cash-to-Assets Ratio | 78.3% | 7.1% |
[4] Downturn Resilience Is N/A
RDDT has fared much worse than the S&P 500 index during various economic downturns. We assess this based on both (a) how much the stock fell and, (b) how quickly it recovered.
But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read RDDT Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – S&P 500, Russell, and S&P midcap. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.