Expanding User Content And Global Reach Will Drive Competitive Differentiation

Key Takeaways

• Growth in user engagement, advertising, and international markets drives strong long-term revenue and monetization opportunities for Reddit.
  
• Unique user data and enhanced search bolster high-margin licensing and sustained platform retention, supporting future earnings expansion.
  
• Reliance on digital ads, global expansion hurdles, moderation risks, uncertain data licensing revenue, and competition for young users threaten Reddit's growth and profitability.

Catalysts

Operates a digital community in the United States and internationally.

• The ongoing shift toward platforms built on user-generated content gives Reddit significant headroom for future user and engagement growth, as evidenced by continued DAU increases, the adoption of tools like Reddit Answers, and successful international launches; these factors all support prospects for long-term revenue expansion and increased monetizable impressions.
  
• As digital advertising budgets increasingly prioritize highly engaged, niche communities, Reddit's 84% YoY ad revenue growth, broadening advertiser base, and introduction of formats like Dynamic Product Ads position it to capture a greater share of this secular trend-potentially lifting revenue and net margins over time, especially as ad stack improvements enhance advertiser ROI.
  
• The value of Reddit's data for AI/LLM training is gaining wider recognition, as demonstrated by their data licensing deals and status as a top-cited source for LLMs; Reddit's growing corpus and unique conversation base position the company to expand high-margin data licensing revenues in the years ahead.
  
• Investment in search and discovery tools, including the unification of Reddit's core and LLM-based search, is expected to drive deeper retention and time-on-site metrics, which are key to supporting higher ARPU and sustaining long-term earnings growth.
  
• International expansion accelerated by machine translation and localized community-building initiatives has just begun to show results, with early successes in non-English markets pointing to untapped user and advertiser growth drivers that could have a meaningful positive impact on future revenue and earnings.

Reddit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reddit's revenue will grow by 31.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $4.72) by about August 2028, up from $216.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $370.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.9x on those 2028 earnings, down from 183.2x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Reddit Future Earnings Per Share Growth

Risks

• Heavy dependence on digital advertising revenue, with 84% year-over-year growth in Q2, exposes Reddit to risks from declining online ad efficacy due to privacy changes (like cookie deprecation and ad tracking restrictions) and economic downturns, potentially impacting future revenue growth and margins.
  
• International expansion, while showing early promise, still relies heavily on machine-translated content and nascent local communities; failure to achieve true local relevance and user-generated content in non-English markets could limit Reddit's total addressable market and long-term user growth, directly affecting future revenue potential.
  
• Scaling active moderation and content quality remains a challenge-Reddit's diverse, user-generated platform faces ongoing risks around content moderation, community standards, and potential regulatory scrutiny, which could lead to increased compliance costs, negative publicity, or advertiser pullback, ultimately compressing net margins and impacting earnings.
  
• Data licensing, though highlighted as a strategic opportunity, is a small portion of current revenues ($35 million out of $500 million in Q2) and there remains high uncertainty about the durability, exclusivity, and competitive landscape for AI training data deals, possibly capping earnings diversification if this segment stalls or competition increases.
  
• Intensifying competition for user engagement from platforms catering to evolving generational preferences (e.g., TikTok, Discord, visually-oriented or ephemeral services) may erode Reddit's relevance among younger users; if Reddit fails to successfully evolve its product or onboarding experience, it risks DAU stagnation or decline, directly undermining long-term earnings growth.

Valuation

• The analysts have a consensus price target of $195.962 for Reddit based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $235.0, and the most bearish reporting a price target of just $75.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 55.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $211.82, the analyst price target of $195.96 is 8.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.