Reddit earnings estimates raised but valuation multiple lowered; user growth will determine the scope for further re-rating

Overview

This report updates the earnings model following Reddit's better-than-expected second-quarter results and third-quarter guidance. Morgan Stanley raised its revenue, adjusted EBITDA, and EPS forecasts while lowering the valuation multiple and target price due to weaker US user growth and reduced traffic visibility caused by changes to Google's search algorithm. The firm believes the advertising business and profitability are delivering, while the current valuation already reflects substantial user uncertainty, and therefore maintains its Overweight rating.

Core views

First, Reddit's recent operating performance continues to exceed expectations. Based on better-than-expected second-quarter results and strong third-quarter revenue guidance, Morgan Stanley raised its 2026 and 2027 revenue forecasts by 3% and 4%, respectively, with the new forecasts implying revenue growth of 59% and 37%. The 2026 and 2027 adjusted EBITDA forecasts were raised by 4% and 5%, respectively, while EPS forecasts were raised by 14% and 10%, respectively; annual EPS forecasts are $4.94 for 2026, $6.54 for 2027, and $8.65 for 2028. The flow-through of revenue growth to profits is not entirely synchronous because the firm also raised cost of revenue and sales and marketing expense estimates: the former reflects higher AI cloud spending as Reddit optimizes its feed algorithm, while the latter reflects increased paid marketing to offset reduced new-user visibility caused by changes in Google search traffic. The report views these expenses as necessary investments to support more durable user and engagement growth rather than merely cost deterioration. Second, the target price cut reflects valuation compression rather than weaker fundamental forecasts. Weaker-than-expected US user growth, combined with Google's ongoing search algorithm adjustments, has reduced visibility into future user growth. Morgan Stanley therefore lowered its target EV/EBITDA multiple based on blended 2027/2028 EBITDA from 22x to approximately 15x and reduced its target price from $240 to $210. Based on the August 20, 2026 closing price of $150.31, the upside cited in the report remains approximately 40%. The $210 target also corresponds to approximately 24x 2028 EPS and approximately 0.5x 2028 PEG, representing an approximately 50% PEG valuation discount to peers. Based on a peer regression using revenue-growth-adjusted valuation multiples and adjusted EBITDA margins, the $210 target is also approximately 50% below the regression-implied valuation. The firm therefore believes the current valuation already reflects a considerable degree of user growth uncertainty and that re-rating potential remains if growth visibility improves. Third, user growth is the most critical valuation variable for the next phase. Morgan Stanley believes that sustained user growth in North America, particularly the US, even at fewer than 1 million net additions per quarter, would be sufficient to serve as an important catalyst for a stock re-rating. The report focuses on whether paid marketing, algorithm and feed improvements, and product upgrades involving search, new use cases, and user onboarding can offset the effects of Google's algorithm changes; headwinds from Google search traffic could also reverse, as they have in the past. The model forecasts the user base to increase from 121.4 million in 2025 to 137.7 million in 2026, 153.2 million in 2027, and 166.8 million in 2028. Fourth, advertising monetization remains the core source of growth and profit. Reddit's interest- and context-based community structure offers unique value to users and advertisers, and the report believes seven advertising innovation drivers can support advertising revenue CAGR of approximately 54% from 2024 to 2027. The base case forecasts total revenue CAGR of approximately 55% from 2024 to 2027, with the core assumption that new advertising products and tools can improve lower-funnel conversion for advertisers. Reddit still has a significant monetization gap: its 2023 ARPU was 74% and 39% lower than Pinterest's and Snap's, respectively. Therefore, in addition to user growth, narrowing the ARPU gap represents another source of revenue upside. ARPU in the model increases from $18.14 in 2025 to $25.41 in 2026, $31.28 in 2027, and $36.86 in 2028. Fifth, high-margin data licensing and operating leverage constitute a second path to profitability. The report estimates that Reddit's contracted data licensing revenue totals more than $400 million over the next three years and includes $140 million of licensing revenue in its 2027 model, which the firm considers conservative. Beginning in 2027, renegotiations of existing licensing agreements will directly affect profitability and valuation multiples. Meanwhile, gross margins of approximately 90% or higher and scale leverage in research and development, sales and marketing, and general and administrative expenses are expected to increase the adjusted EBITDA margin from -9% in 2023 to approximately 48% in 2027. Adjusted EBITDA is forecast to increase from $845 million in 2025 to $1.595 billion in 2026, $2.320 billion in 2027, and $3.055 billion in 2028. Finally, the scenario analysis shows that execution differences in users, advertising monetization, and the licensing business could significantly alter the valuation range. The bull-case target price is $300, based on approximately 19x blended 2027/2028 EBITDA, assuming faster user growth, a quicker-than-expected advertising revenue ramp, faster narrowing of the monetization gap with peers, additional data licensing agreements, and an approximately 52% EBITDA margin in 2027. The base-case target price is $210, based on an approximately 15x multiple, assuming advertising tools improve conversion, search and new-user onboarding support user growth, and the 2027 margin reaches approximately 48%. The bear-case target price is $90, based on an approximately 8x multiple, assuming slowing user growth, continued intense competition for user time and advertising budgets, scaled competitors continuing to raise the product bar, and heightened content suitability, FTC investigation, and long-term generative AI risks, with the 2027 margin at approximately 43%. Regarding positioning indicators, the report lists active institutional investor ownership at 67.6%, the hedge-fund internet sector long/short ratio at 2.4x, and sector net exposure at 11.4%, while noting that the relevant MSPB data may not represent broader market trends.

Analysis framework

Morgan Stanley first updates its revenue forecasts based on actual second-quarter results and third-quarter guidance, then incorporates AI cloud spending and paid marketing investment into cost and expense assumptions to estimate their net impact on adjusted EBITDA and EPS. The report subsequently treats user growth, advertising ARPU, data licensing, and expense leverage as medium- to long-term earnings drivers, while lowering the valuation multiple because changes in Google search traffic have reduced growth visibility. Finally, it cross-checks the target price and risk-reward using EV/EBITDA, 2028 PE and PEG, peer regression, and bull-, base-, and bear-case scenarios.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  Scenario valuation based on blended 2027/2028 adjusted EBITDA

  The report multiplies EBITDA under different scenarios by the corresponding enterprise value multiples: approximately 19x, 15x, and 8x for the bull, base, and bear cases, respectively. The base-case multiple was reduced from 22x to approximately 15x due to lower user growth visibility, corresponding to a $210 target price.

• Valuation MethodPE/PEG valuation

  Comparison of 2028 PE and growth-adjusted PEG

  The $210 target price corresponds to approximately 24x 2028 EPS and approximately 0.5x 2028 PEG. The report uses PEG to compare valuation with growth and notes that this level represents an approximately 50% discount to peers.

• Valuation Method

  Peer regression of revenue-growth-adjusted multiples and adjusted EBITDA margins

  The report also establishes a regression benchmark using peer companies' growth-adjusted valuation multiples and margins; the $210 target price is approximately 50% below the regression model's implied valuation and is used to assess how much user growth uncertainty is reflected in the current price.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  High-margin businesses and operating expense scale leverage

  The report combines gross margins of approximately 90% or higher, growth in advertising and high-margin data licensing revenue, and scale effects in research and development, sales and marketing, and general and administrative expenses to project that the adjusted EBITDA margin will improve from -9% in 2023 to approximately 48% in 2027.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Reddit Inc (RDDT.N)

  The direct subject of the report; the firm maintains its Overweight rating and lowers the target price from $240 to $210.

  Strengths

  Its interest- and context-driven community structure is differentiated; advertising innovation, significant ARPU expansion potential, high-margin data licensing, and gross margins of approximately 90% or higher can support revenue growth and operating leverage.

  Weaknesses

  US user growth is weaker than expected, and user acquisition visibility is affected by changes to Google's search algorithm; the company needs to increase AI cloud and marketing investment to optimize its feed and supplement user acquisition.

  Comparison

  2023 ARPU was approximately 74% and 39% lower than Pinterest's and Snap's, respectively; the 2028 PEG and peer-regression valuation corresponding to the $210 target price both represent an approximately 50% discount to the implied levels of comparable companies.

  Risks

  Slowing user growth, competition for user time and advertising budgets, content suitability and brand safety, the FTC investigation, and the long-term impact of generative AI.

Key data

• Target price adjustment$240.00 reduced to $210.00Valuation multiple lowered, but Overweight rating maintained
• Target price upsideapproximately 40%Relative to the August 20, 2026 closing price of $150.31
• Base-case valuationapproximately 15x blended 2027/2028 EBITDA; 24x 2028 EPSThe target EV/EBITDA multiple was previously 22x
• 2028 PEGapproximately 0.5xApproximately 50% discount to peers
• Revenue forecast adjustment2026 raised by 3%, 2027 raised by 4%The new forecasts imply revenue growth of 59% and 37%
• Adjusted EBITDA forecast adjustment2026 raised by 4%, 2027 raised by 5%The revenue forecast increase is partially offset by AI cloud and marketing investments
• EPS forecast adjustment2026 raised by 14%, 2027 raised by 10%Current annual EPS forecasts are $4.94 and $6.54, respectively
• User base forecast121.4/137.7/153.2/166.8 millionCorresponding to 2025/2026e/2027e/2028e, respectively
• ARPU forecast$18.14/$25.41/$31.28/$36.86Corresponding to 2025/2026e/2027e/2028e, respectively
• Adjusted EBITDA forecast$845mn/$1,595mn/$2,320mn/$3,055mnCorresponding to 2025/2026e/2027e/2028e, respectively
• 2024–2027 advertising revenue CAGRapproximately 54%Driven by advertising product innovation and improved monetization
• 2027 data licensing revenue$140mnMorgan Stanley believes this forecast is conservative
• Contracted licensing revenue over the next three yearsmore than $400mnExisting contract value of the high-margin data licensing business
• 2027 adjusted EBITDA marginbull case approximately 52%/base case approximately 48%/bear case approximately 43%-9% in 2023
• Scenario target pricesbull case $300/base case $210/bear case $90Based on approximately 19x, 15x, and 8x blended 2027/2028 EBITDA, respectively

Impact & implications

The report believes Reddit's advertising growth and profitability have begun to materialize, but whether its valuation can expand again will primarily depend on whether US user growth can stabilize, whether headwinds from Google search traffic can ease, and whether product and marketing investments can improve user acquisition and engagement. If user growth, advertising monetization, and the 2027 licensing agreement renegotiations progress smoothly, the current PEG and regression valuation discounts relative to peers could narrow; conversely, user and advertising competition, regulation, and generative AI risks could push earnings and valuation toward the bear-case scenario.

Risks

• US user growth may continue to fall short of expectations, reducing visibility into future growth and pressuring valuation multiples.
• Ongoing changes to Google's search algorithm may reduce new-user traffic and discoverability, forcing the company to increase marketing investment.
• Continued product improvements by large platforms may intensify competition for user time, attention, and advertising budgets.
• Content suitability and brand safety issues may affect advertiser demand and platform monetization.
• The FTC investigation creates explicit regulatory uncertainty.
• The long-term development of generative AI may adversely affect Reddit's traffic, content value, or data licensing model.

What to watch

• Monitor whether US users can achieve sustained growth; even if quarterly net additions remain below 1 million, the trend would still be critical to a valuation re-rating.
• Monitor the effectiveness of paid marketing, feed algorithms, and product improvements involving search, user onboarding, and new use cases.
• Monitor whether traffic headwinds caused by Google's search algorithm ease or reverse.
• Monitor whether new advertising products and tools can improve lower-funnel conversion and drive ARPU expansion.
• Monitor the renegotiation of data licensing agreements in 2027 and whether revenue can exceed the current $140 million forecast.
• Monitor whether additional high-margin data licensing agreements can further enhance profitability and valuation.