Reddit – A Great Indicator For Highly Overvalued Growth Stocks

For God so loved the world that He gave His only begotten Son, that whoever believes in Him should not perish but have everlasting life.

John 3:16

John 3:16 is a Bible verse that many know, even those who have no interest in the Gospel. For a Christian, this is a universal statement of hope for all of humanity. This is also a great example of the purest form of equity, another term that gets a lot of attention these days. The life, death, and resurrection of Jesus Christ is a testament to God’s love for every person alive today across the globe. God’s only request is that I accept Jesus Christ as savior and proclaim this good news to all so that they too can choose their path with or without God.

Unfortunately, when it comes to everlasting life, investments and any other financial assets will no longer be necessary anymore.  But through the gift of time that I have been given from God here on earth, my investments serve as an extension of the Lord’s provision and His entrusting of these assets to me as a steward. My recognition of this is a direct reason for me to take very seriously how I manage my investments and to continually assess my goals, objectives, and performance as a form of being a good steward.

Reddit, Inc. (RDDT) is down just over 13 percent in after-hours trading since the company announced its earnings results. RDDT saw some good results for all of 2024 including 62 percent revenue growth and substantial operating cash flow inflection to the tune of a 17 percent margin from prior years’ negative performance.

I guess the market was expecting the next couple of years of revenue growth to remain north of 40 percent. Revenue expectations are still very robust, with average analyst estimates above 30 percent, which would take today’s $1.3 billion in revenue towards $2.3 billion.

But there are many companies out there, notably in the growth-oriented sphere, that are substantially overvalued. RDDT is clearly one of them as today’s results and closing stock price just above $216 per share, placed EV/Sales and OCF/Share at 32 and 194 times respectively.

Over the next five years, and if RDDT’s cash flow continues to inflect further, one could expect to see the company’s cash flow per share increase at a 5-year annualized rate of around 200 percent. This could lead some to believe a multiple near 200 times may be justifiable. The problem is that as each year’s cash flow growth continues to grow, the next 5-year expectations begin to drop substantially, thus impacting valuation levels.

This is already reflected by the market as the slowing top-line growth projection from RDDT’s management for the upcoming quarter has provided a dose of reality. RDDT’s current overvaluation level is to an extreme degree and investors interested in purchasing this stock will need to exercise some patience before going long. As an example, based on 2026 financial estimates and assuming 50 times OCF/Share multiple (still a premium across peers), RDDT would be trading at a stock price around $104 per share.

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