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Since Reddit (NYSE: RDDT) went public in March 2024, the social media company’s shares have gone up 229%. At the time of the initial public offering (IPO), Reddit was valued at $6.4 billion, with RDDT stock priced at $34 per share. The company’s market cap is now $28.6 billion.At press time, RDDT shares closed at $167.08, tracking 128.94% returns to shareholders over the last six months. Last Monday, RDDT stock hit an all-time high price of $179.49, more than double the 52-week average of $81.06 per share.But is Reddit’s current lofty price level an anomaly, or does it have staying power?

Reddit’s Fundamentals: Concentrated Network Effect
Reddit’s importance in the social media landscape was best demonstrated during the Reddit blackout in June 2023, when moderators protested Reddit’s API pricing for third-party apps. It then became apparent that much of Google search results hinge on the site’s content.This is expected given that Reddit is effectively the internet’s forum of forums (subreddits). Instead of having dozens of accounts for each forum category, Reddit enables internet users to access all topics under the sun with a single account. This creates a feedback loop:

Such is Reddit’s content concentration, over 100k subreddits, that OpenAI (ChatGPT) partnered with the company in May 2024 to “access Reddit’s Data API, which provides real-time, structured, and unique content from Reddit.”In terms of user growth, Reddit’s network effect yielded 97.2 million daily active uniques in Q3 2024 (ending October), which is a 47% year-over-year increase. As of January 2025, according to Ahrefs’ traffic data, Reddit ranks 6th worldwide with a 762.1 million search traffic volume, which is valued at $386.4 million.

Reddit’s Profitability Finally Taking Off?
Like many social media sites, Reddit has struggled for years to achieve sustained profitability, as indicated by positive net income for consecutive quarters. Before the IPO, Reddit reported $159 million net loss in 2022, and another $91 million net loss in 2023.Over its nearly 20-year history, Reddit accumulated a deficit of $1.27 billion.Following the IPO in 2024, the company’s first profitable period is the latest one reported, ending October for Q3 with a $30 million net income. The revenue went up 68% year-over-year to $348.4 million. More importantly, Reddit’s gross margin, as a measure of core profitability after the cost of goods sold (COGS), increased to 90.1%, a 280 bp improvement from the year-ago quarter.Likewise, Reddit’s free cash flow inverted positively, going from a $11.6 million drain in 2023 to a $70.3 million gain.  Lastly, the company has very low debt. Against $2.17 billion in assets, Reddit’s total liabilities hold at $194 million. The Q3’s diversion from previous quarters is why RDDT stock skyrocketed in the last three months. However, there are some hard limits to Reddit’s growth to consider.

Three Factors that Can Limit Reddit’s Growth
Three main factors serve as limits to Reddit’s growth. Geographical/Language LimitThe first one is geographical, as Reddit is Anglosphere-centric. Although English is the world’s dominant language, with ~400 million native speakers and understood by ~1.5 billion people, there are degrees of proficiency.Less proficient people will lack the nuance understanding of the language to participate or contribute to Reddit’s content significantly.Moreover, not only is the number of native English speakers who want to participate in Reddit’s communities far less than 400 million, but non-native English speakers tend to form their own local communities. China is the most extreme example with deliberate policies to create its own online ecosystem.Traffic Flood LimitThe second limit to Reddit’s growth is technical in nature. Although benefiting from the network effect, this same force is creating high-traffic subreddits. So much so that they become similar to chat boxes. The flood of content is then a game of attention, as much of posting goes unnoticed and unresponded, disincentivizing user participation in the process.Reddit’s solution to this problem is diluting popular subreddits into sub-subreddits, named slightly differently. To alleviate the issue further, Reddit implements a voting system that delivers karma points to users. If there is not a sufficient threshold of karma points, the user’s post is auto-removed upon posting.However, this tool also serves as a behavioral control, which feeds into Reddit’s third growth limit.Ideological Capture LimitIt is no secret that Reddit predominantly leans left. In a study sifting through 600 million Reddit posts, Justin T. Huang, Jangwon Choi and Yuqin Wan, at the University of Michigan Ross School of Business, found that:

“…if commenters had different political opinions than moderators, then they were more likely to have comments removed.”

This is on top of Reddit’s karma system which enforces group consensus. If content veers off that path, and the karma point threshold lowers, the content is auto-removed as previously noted. Such a system creates a strong auto-censorious drive in addition to disincentivizing user participation. This study refers to content removal even with sufficient karma points as a matter of ideological capture. The authors refer to this issue as the following:

“This bias in content moderation creates echo chambers, which are online spaces characterized by homogeneity of opinion and insulation from opposing viewpoints.”

However, the problem in ideological capture is that allowed content is viewed as default and anything other than that is deviant. Therefore, it is then unlikely that self-reflection or course-correction could happen unless it comes from the top management.When Mark Zuckerberg apologized for colluding with the government to enforce mass censorship, this sent a signal to the social media landscape. Most recently, Zuckerberg announced a censorship reversal, starting with the removal of third-party “fact-checkers” and replacing them with Community Notes.This move is likely coming from X being less censorious, making Facebook less relevant down the line. Likewise, if Reddit continues with its moderation policies, the site will stand out from the new social media landscape that began to shape when Elon Musk bought Twitter. 

The Bottom Line
If Reddit leadership receives the signal sent by Mark Zuckerberg, Reddit’s powerful network effect could yield even greater traffic gains, which would transfer into even greater revenue and profits. The AI-powered search tool announced in early December will then further amplify that effect. 

“2025 could be the year for Reddit to improve its search functionality, enhancing the user experience and driving growth,”

Thomas Champion, equity analyst for Piper Sandler

Investors certainly expect such outcome, given the extremely high forward price to earnings (P/E) ratio of 200. WSJ’s forecasting data points to an average RDDT price target of $157.43, which is just under the current level of $x per share. The low estimate is $85 while the high RDDT forecast is $210 per share. The divergence between low and high price target points to uncertainties related to Reddit’s three growth limits.More By This Author:Strong December Jobs Report Dampens Rate Cut Hopes
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