Is Reddit Stock an Undervalued Stock to Buy? | RDDT Stock Discounted Cash Flow Valuation

Added: 2026-05-31

[00:00:00]Reddit stock is down 38% year-to date in 2026 and investors want to know if at these lower prices if Reddit stock is undervalued. I'll answer that question by sharing with you my calculation on fair value for Reddit. What's a fair price to pay for this stock? And is the current market price below that fair price? I want to thank the Mly full for sponsoring this video. Visit fool.com/parkev for the 10 best stocks to buy now.

[00:00:30]>> You can see the price action here for Reddit stock with most of its losses coming earlier in the year. And since the lows hit during uh February, February 12th was the low at $131 per share. The stock has been volatile and trading in a range around $144 as of this recording. So today I've updated my cash flow valuation for Reddit with some of the changes since I last evaluated the company. And in my discounted cash flow valuation model, there are a few elements. The primary element is the top part you see here, which is the estimate for what I believe the company will generate in free cash flow between today and the very very long run. And then below that estimate I have the weighted average cost of capital. What discount rate am I using to apply to those future free cash flows? And we do need to discount those cash flows in the future because of the risk factor and because of the time value of money. Money in our pocket today is worth more than money promised to us in the future. And so we need to apply a calculation that determines precisely how much money is worth today versus in the future. Right? You have to ask yourself that question. If Reddit owes you $1 5 years from now, how much is that worth to you today? Is it 80 cents? Is it 75 cents? Is it 90? What is that worth to you? And this is an individualized calculation. Sure, there are estimates of what the market overall calculates as the company's cost of capital and the discount rate, but those estimates could be different for every individual. Warren Buffett is famous for using a very very low discount rate on the companies when he's discounting cash flows for the future and others use more aggressive pricing on the risk factor depending on the company they're following. So there's wide variety in discount rate calculations among stock market participants. So let's start with the estimates for the cash flow. So I'm forecasting that Reddit will generate $1.21 billion in free cash flow in 2026 and that figure will rise quickly. By 2030, I expect its cash flow to reach $3.25 billion. And by 2034, I expect that to reach seven and a half billion dollars. Of course, Reddit and other social media companies are lucrative in that they're not paying for the content that's being created on the platform.

[00:03:22]All of the individuals that are posting and engaging on Reddit are creating the content that Reddit then gets to monetize. It monetizes the content by showing you advertisements while you're on the platform. And more recently, it's been monetizing the content by selling it to companies that are developing large language models. The data on the platform is very useful when companies are trying to build and develop and train large language models for artificial intelligence. And so in that way, Reddit has a lucrative business model that's growing the fastest among all social media companies. It's the smallest among the group of uh meta platforms, Snap, Pinterest. It's the smallest one compared to those, but it's the fastest growing compared to those.

[00:04:10]So, the weighted average cost of capital I'm applying to Reddit is 13.8%.

[00:04:17]I'm estimating a after tax cost of debt of 6 and 3/4%.

[00:04:23]And a cost of equity using the capital asset pricing model at 13.8%. 8%.

[00:04:29]Remember the capital asset pricing model, the formula is the risk-free rate plus the company's beta multiplied by the market risk premium. So the company's beta is 1.55. And you can observe this by conducting a regression analysis taking Reddit's stock price against the S&P 500 stock price movements over the previous. You can go back a month, you can go back a year, you can go back five years and develop a beta by conducting that regression analysis. You can also just observe this number. It's provided by many financial analysis providers. You can see this number on Yahoo Finance. You can see this number if you have the iPhone and you open the stock uh the stock market app and it has the information. So this number is observable. You don't need to calculate that beta yourself. The risk-free rate I'm using is 4.5%.

[00:05:31]I usually apply a risk-free rate that's very close to the 10-year US government bond yield. That's the risk-free rate that I apply to my discounted cash flow valuation calculations. And the market risk premium I'm applying right now is 6%. I view the current market as being more risky than usual and typically the range of estimate you apply for a market risk premium is between 4% and 6%. All the financial papers, the finance papers and textbooks that I read and that I use at university all suggest that historically a 4 to 6% is the appropriate market risk premium. And you can go towards the lower end when you view the risk factor in the economy as being lower. And you can go to the higher end when you view the risk factor in the economy being higher. Right now I view the risk factor in the economy as being higher. We've got several huge risk factors including two ongoing wars.

[00:06:40]We've got the implications of tariffs.

[00:06:42]We've got a volatile leadership around the world and lots of geopolitical tension not just between the United States and everyone else because when the United States placed tariffs all of its trading partners right the whole world got upset with the United States and then there's geopolitical tension between several other countries and so I view this current environment as being risky ier than usual. So I'm applying a higher risk premium. And so after all of that, I come to the conclusion that the value of equity in Reddit is 37.9 billion. I divide that by the number of shares outstanding. And I come to the conclusion the business is worth $19641 to be precise. The current market price is $14340.

[00:07:42]And so comparing the current market price with my intrinsic value calculation, I can come to the conclusion that Reddit stock is indeed undervalued. And that's even after I apply a 10% margin of safety, it's still undervalued because the undervaluation goes beyond the 10% margin of safety.