As of June 15, 2025, Reddit, Inc. (RDDT) is trading at $118.18 per share, reflecting significant investor interest in the social media platform. But is this price justified, or is Reddit overvalued? To answer this, I conducted a detailed intrinsic value analysis using two renowned valuation methods: the Buffett Valuation Method (inspired by Warren Buffett’s Discounted Cash Flow approach) and the McGrew Valuation Method. Below, I’ll walk you through the process, results, and implications for investors, leveraging financial data from Reddit’s quarterly reports to provide a clear picture.
Why Intrinsic Value Matters
Intrinsic value represents the “true” worth of a company based on its fundamentals, such as cash flows, growth potential, and risk. By comparing this value to the market price, investors can determine whether a stock is undervalued (a potential buy) or overvalued (a signal to hold or sell). The Buffett and McGrew methods are rigorous approaches that project future cash flows and discount them to the present, offering a disciplined way to assess Reddit’s valuation.
Data Collection: Building the Foundation
To perform the analysis, I used financial data from Reddit’s quarterly cash flow and balance sheet reports for 2020–2024, as 2025 data was incomplete (only Q1 available). Here’s what I gathered:
- Free Cash Flow (FCF): FCF is critical for valuation, as it reflects the cash a company generates after expenses and capital expenditures. I calculated annual FCF by summing quarterly figures:
- 2024: $215.82 million
- 2023: -$84.84 million
- 2022: -$100.46 million
- 2021: -$137.48 million
- 2020: $1.36 million (Q4 only, likely understated due to limited data)
- Shares Outstanding: As of Q1 2025, Reddit had 184,267,286 shares outstanding, used to calculate per-share intrinsic value.
- Last Closing Price: The provided price of $118.18 was assumed to be the most recent trading day’s close (e.g., June 13, 2025). Without access to real-time market data, I relied on this figure.
- Growth Projections: The methods require a 3-5 year FCF Compound Annual Growth Rate (CAGR). However, negative FCF from 2021–2023 made CAGR calculations unreliable. Following the methodology, I classified Reddit as a growth stock (given its tech sector and recent FCF improvement) and assumed a 10% growth rate for projections.
Limitations: The 2020 FCF data was incomplete, and negative FCF in earlier years limited the reliability of growth estimates. Additionally, I couldn’t verify the closing price against sources like Yahoo Finance due to the absence of real-time data access.
Buffett Valuation Method: A Conservative Approach
The Buffett Valuation Method projects FCF over 10 years, calculates a terminal value, and discounts everything back to the present. Here’s how it worked for Reddit:
- Starting FCF: I used 2024’s FCF of $215.82 million as the base.
- Growth Rate: With an unreliable CAGR, I applied a 10% constant growth rate for Years 1–10, as Reddit qualifies as a growth stock.
- FCF Projections: Using the formula FCFₙ = FCF₀ × (1 + 0.10)ⁿ, I projected FCF up to Year 10 (2024 FCF = $215.82M, Year 10 FCF = $559.78M).
- Terminal Value: Calculated as Year 10 FCF × (1 + 2.5%) ÷ (8% – 2.5%) = $10.43 billion, using a 2.5% perpetual growth rate and 8% discount rate (4% Treasury + 4% premium).
- Present Value: Discounted all FCFs and the terminal value at 8%. The sum was $7.24 billion.
- Intrinsic Value per Share: $7.24 billion ÷ 184,267,286 shares = $39.28.
- Price with 25% Margin of Safety: $39.28 × 0.75 = $29.46.
Result: Reddit’s intrinsic value per share is $39.28, far below its market price of $118.18.
McGrew Valuation Method: Accounting for Growth Dynamics
The McGrew Valuation Method adjusts growth rates for growth stocks, declining from the initial rate to 10% by Year 7. Since I assumed a 10% growth rate for Reddit (due to the unreliable CAGR), there was no decline needed, and the McGrew Valuation mirrored the Buffett Valuation:
- Intrinsic Value per Share: $39.28
- Price with 25% Margin of Safety: $29.46
This alignment occurred because the assumed 10% growth rate matched the Buffett method’s growth stock parameters, highlighting the impact of data constraints on the analysis.
Valuation Status: Is Reddit a Buy?
To determine Reddit’s investment potential, I compared the closing price ($118.18) to the intrinsic value ($39.28):
- Percentage Difference: ($118.18 – $39.28) ÷ $39.28 × 100 = 200.87%
The methodology defines valuation status as:
- Screaming Buy: Closing price ≥ 25% below intrinsic value ($29.46)
- Buy: 7%–25% below ($36.53)
- Hold: 6% below to 35% above ($36.93–$53.03)
- Overvalued: >36% above ($53.42)
With a 200.87% premium over intrinsic value, Reddit is Overvalued under both methods.
What Does This Mean for Investors?
Reddit’s $118.18 share price significantly exceeds its estimated intrinsic value of $39.28, suggesting caution for investors. The overvaluation may stem from market enthusiasm for Reddit’s growth potential, user base, and recent FCF improvement. However, the analysis highlights risks:
- FCF Volatility: Negative FCF in 2021–2023 indicates operational challenges, though 2024’s recovery is promising.
- Growth Uncertainty: The 10% growth assumption may be conservative, but higher rates would require stronger justification given historical data.
- Market Sentiment: High valuations often reflect speculative demand, which could lead to price corrections if growth falters.
For value investors, Reddit isn’t a buy at current prices. Those bullish on Reddit’s long-term prospects (e.g., monetization of its platform or AI-driven advertising) might justify holding, but they should monitor FCF trends closely.
Using the Buffett and McGrew Valuation Methods, Reddit (RDDT) appears overvalued at $118.18, with an intrinsic value of $39.28 per share. The analysis, constrained by volatile FCF and limited 2020 data, underscores the importance of rigorous fundamental analysis in navigating hyped stocks. Investors should weigh Reddit’s growth narrative against its current premium and consider waiting for a better entry point.
