Reddit Announces $1B Buyback Amid Stretched Valuation and Mounting Growth Risks

What happened

Reddit has reported its Q4 and full year 2025 results, simultaneously unveiling a $1 billion share repurchase program that management frames as part of a 'next era' focused on execution and innovation. The DeepValue master report indicates that at $165, the stock prices in sustained mid-teens DAU growth and ~40% revenue growth, leaving minimal margin of safety in a crowded long trade. This buyback signals confidence from leadership, but it arrives when valuation metrics like a P/E of 89x are elevated and structural threats from AI search disintermediation and decelerating data licensing revenue loom large. Critically, the report notes that Other revenue—including AI data deals—slowed to 7% YoY growth in Q3 2025, highlighting Reddit's heavy reliance on ad monetization amid competitive and investment pressures. Investors should scrutinize this move as a potential use of strong cash flow that may not address underlying risks, rather than a fundamental improvement.

Implication

Reddit's initiation of a $1 billion share repurchase program reflects robust free cash flow generation, yet it risks being seen as a defensive gesture to bolster shareholder sentiment amid a stretched P/E of 89x. Management's optimism clashes with the DeepValue report's warning that revenue growth could slow toward the mid-30s and EBITDA margins compress due to rising AI and product investments, potentially triggering multiple contraction. This action could temporarily offset skepticism in a crowded long market, but it fails to mitigate core threats such as Google's AI search eroding traffic or legal uncertainties around data licensing renewals. Importantly, the buyback utilizes cash that might otherwise provide a buffer against future downturns, highlighting a capital allocation decision that prioritizes near-term optics over long-term risk management. Consequently, investors should maintain a cautious stance, as this move does not alter the fundamental expectation that downside from growth or margin normalization outweighs upside over the next 6-18 months.

Thesis delta

The announcement of a $1 billion share repurchase does not shift the cautious thesis from the DeepValue report, which rates Reddit as a POTENTIAL SELL due to limited margin of safety at current valuations. It reinforces management's bullish outlook but overlooks persistent risks like AI search headwinds and slowing data licensing growth, keeping the recommendation to wait for a pullback or fundamental re-acceleration before considering incremental capital deployment.