Hook & thesis
I publicly underestimated Reddit's ability to convert its unique dataset and community signals into AI-driven revenue. The recent quarter and a string of enterprise partnerships suggest management is starting to monetize Reddit's conversational data in ways that go beyond traditional display ads. If AI products - for brand intelligence, ad targeting and enterprise search - scale, Reddit's already-strong topline growth could reaccelerate and justify a higher multiple.
That makes RDDT a tactical long here. The setup combines an attractive technical base (RSI ~33, MACD turning bullish), clear fundamental momentum (70% year-over-year revenue growth to $726M in the quarter) and a valuation that, while premium, still ties back to a story of accelerating revenue and improving free cash flow ($684M annual free cash flow). I outline a trade with precise entry, stop and target for a long-term horizon (180 trading days), and explain the numbers and risks that underpin the view.
What Reddit does and why the market should care
Reddit operates a massive forum platform where communities form around interests, trends and products. The combination of 121M daily active users and 100K+ communities positions Reddit as a real-time barometer of consumer sentiment. Historically the company has monetized this with ads targeted by community and interest, but the more valuable channel now is enterprise-grade access to conversational signals: trend detection, brand health monitoring and AI-powered ad optimization.
Why that matters: advertisers and enterprise customers want first-mover signals. Reddit's conversations are often early indicators of product interest, meme cycles, and consumer problems. Turning those signals into AI-driven products gives Reddit new high-margin revenue streams (data licensing, API access, AI append services) that can grow faster than traditional ad units and command better price realization.
What the numbers show
Start with the quarter: adjusted EPS of $1.24 (above consensus $0.94) and revenue up 70% year-over-year to $726 million. Those results show strong monetization traction across ad products and early enterprise efforts. On a capital structure and valuation basis, Reddit trades at a market capitalization of roughly $27.13 billion and enterprise value near $26.19 billion.
| Metric | Value |
|---|---|
| Market cap | $27.13B |
| Enterprise value | $26.19B |
| Revenue (Q4) | $726M (70% YoY) |
| Free cash flow (TTM) | $684M |
| P/E | ~51-54x |
| Price/Sales | ~12.3x |
Profitability metrics look respectable for a high-growth platform: return on assets ~16.4% and return on equity ~18.1%. Those numbers indicate Reddit is already generating returns on invested capital; the key question is whether AI products can both grow revenue and improve margins (and thereby justify current multiples).
Technical context
From a trading perspective, the setup is constructive. Price is around $143.20, close to the 10-day SMA (~$142.75) and below the 20- and 50-day SMAs, marking a consolidation after the post-earnings move. RSI sits near 33.6, indicating the stock is not overbought and could be base-building. MACD is showing bullish momentum with a positive histogram, suggesting downside momentum may be fading. Average daily volume is about 6.46M shares, so moves can be liquid enough for execution. Short interest is meaningful at ~18M shares, creating the potential for squeeze dynamics should sentiment flip.
Valuation framing
At roughly $27.1B market cap and a P/S north of 12x, Reddit is priced as a growth compounder. That multiple looks steep against old-media comparables, but it's more reasonable when benchmarked to companies that have successfully expanded into enterprise AI products. Consider: Reddit already produces strong free cash flow ($684M), positive ROE and healthy growth. If AI monetization ramps and revenue growth remains in the high double-digits, multiple compression risk declines. Conversely, if user growth and ad RPMs stall, the current multiple will be hard to defend.
Catalysts to watch (2-5)
- Further disclosure and monetization updates on AI/data products from management - quarterly commentary that quantifies enterprise revenue or ARR would be a major multiple driver.
- New enterprise partnerships and data deals (recent Meltwater deal is an example) that show scalable demand from brands and agencies.
- Continued beats on revenue and EPS with revenue growth staying above 50% - that would validate higher price/sales multiples.
- Macro easing: lower interest rates or a stronger ad spend environment would lift growth comps across ad platforms.
- Technical breakout above the 50-day SMA (~$185) would attract momentum buyers and could compress short interest.
Trade plan (actionable) - long term (180 trading days)
Horizon: long term (180 trading days). I expect it will take multiple quarters for AI products to meaningfully show up in guidance and to re-rate the business. Use the following actionable levels:
- Entry: $140.00
- Target: $190.00 (primary target for the 180-trading-day horizon)
- Stop loss: $125.00
Rationale: Entry at $140 gives a modest discount to current price and aligns with the 10-day SMA support band, improving the risk-reward. The $190 target prices the company at a materially higher revenue multiple but remains attainable if AI-related enterprise revenue and ad RPMs reaccelerate. The $125 stop caps downside in the event user growth deteriorates or ad spend weakens materially.
Position sizing and risk framing
This is a medium-risk trade. The stock trades at premium multiples that assume continued strong execution. Position size should reflect that: consider allocating a portion of risk capital that you are willing to hold through volatility and a potential 10-20% drawdown. Re-evaluate after each quarterly report. If AI revenue is explicitly disclosed and grows into a meaningful revenue line, consider adding on strength; if user metrics or ad RPMs slip, reduce exposure.
Key risks and counterarguments
- Ad revenue cyclicality: Advertising spend remains cyclical and sensitive to macro shocks. A broad pullback in advertiser budgets would hit revenue even if AI products gain traction.
- User growth concerns: Management flagged softer U.S. user growth recently. If engagement stalls, the value of Reddit's dataset for AI training and targeting diminishes.
- Valuation sensitivity: At ~51-54x P/E and 12x price/sales, expectations are high. Any deceleration could trigger sharp multiple compression.
- Competition and product risk: Large competitors with deeper AI budgets (Google, Meta, Microsoft) could offer alternative data and ad solutions that blunt Reddit's commercial opportunities.
- Execution risk on enterprise sales: Building a scalable enterprise business differs from ad stacking; sales cycles can be long and margins may take time to mature.
Counterargument: One could reasonably argue the market has already priced in the best-case scenario for AI monetization. The premium multiple reflects not just current growth but also the potential AI upside. If AI products underdeliver or adoption is slower than expected, the stock can fall hard. That view is credible and the stop at $125 is designed to respect that risk.
What would change my mind
I would become more bullish (and increase position size) if management starts to disclose AI-specific metrics - for example, enterprise ARR, gross margins on data products, or meaningful commentary on AI-driven ad RPM uplift. Conversely, I would reduce or exit the position if user engagement metrics deteriorate materially (declining DAUs/MAUs or session length), ad RPMs drop quarter-over-quarter, or if guidance turns cautious about enterprise adoption.
Conclusion
Reddit is at an inflection point. The company showed it can still grow revenue at a high rate and is beginning to place enterprise partnerships that validate the value of its conversational data. That's why I say I underestimated Reddit's AI revenue potential. The trade here is a structured long for the next 180 trading days: entry $140.00, stop $125.00, target $190.00. Reward is substantial if AI monetization scales; risk is meaningful if user growth or ad demand falters. Manage position size, watch the next couple of quarters for concrete AI revenue signals, and treat the stop as a guardrail against the valuation risk that comes with premium growth names.
Trade levels: Entry $140.00, Stop $125.00, Target $190.00 - horizon: long term (180 trading days).