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Reddit (RDDT) offers investors more cash for its price than most large companies. Its free cash flow yield sits at 6.1%, compared with 4.1% for the median S&P 500 company. That valuation follows a hard year, as Reddit stock fell 45.7% in the twelve months to November 4 while the S&P 500 returned 14.9%. Cheap cash means either a bargain or a business investors expect to shrink. So which is it for Reddit?
Reddit's Sales And Cash Are Still Growing Fast
So far, Reddit's figures lean to the bargain side. Revenue rose 62.2% over the twelve months to September from the twelve months before, and free cash flow reached $1.2 billion, up from $510 million a year earlier.
Shareholders own a piece of the free cash Reddit produces whether or not it is paid out, just as they own a share of its profit. When investors start to value that cash, the share price tends to rise, more so when the cash is growing.
Reddit generates that cash through advertising. Ads accounted for $847 million of its $895 million in third-quarter revenue. The platform requires very little equipment, and capital spending came to 0.55% of its cash from operations over the past twelve months. Its operating margin over that period was 29.4%, up from 13.8% a year earlier. Twelve-month free cash flow has risen at every quarter end since September 2023, when it was still below zero.
The company also owes almost nothing. Reddit ended September with $31.4 million of debt against $3.03 billion of cash and short-term investments, leaving lenders with little claim on what the business makes.
Reddit Warns Daily Users Could Fall In Q4
The risk Reddit named on its October 29 call centers on users, not cash. Management said search referral traffic fell meaningfully in the third quarter and dropped by an average of more than 1 million referrals a week in October. If that pace continues, management said daily users could fall by a low double-digit percentage in the fourth quarter from 130 million.
The share price appears to assume fewer users will cost Reddit revenue, but so far the drop in daily users remains a forecast rather than a result. Management did say total sessions are down because of the decline in search referral traffic, and the stock fell 29% on October 30, the day after that call. News reports that day also blamed a revenue outlook that came in below Wall Street's expectations. Management expects fourth-quarter revenue of $1 billion to $1.03 billion. That would be 38% to 42% more than a year earlier, slower than the 53% growth Reddit reported for the third quarter, but still growth.
Management is working to move users onto the app. Reddit shifted part of its U.S. marketing from the web into app installs, and in the fourth quarter it begins testing a logged-in only Reddit in select markets outside the U.S. Management said 80% of what Reddit earns from its users comes from people on its app or logged in.
What Reddit Investors Should Watch Next
Management said Google is not sending people to Reddit the way it used to. For an owner, the open question is whether Reddit's cash keeps growing as that goes on. The company's cash record runs through September, and the fall in daily users that management warned about would come after it, in the fourth quarter. Debt is not an open question, since Reddit holds far more cash than it owes.
Daily users, and fourth-quarter revenue against management's guide, are the measures to watch when Reddit next reports, expected in February 2027.
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