Reddit's AI Data Hype Confronts Valuation and Engagement Headwinds

What happened

Reddit delivered strong Q3 2025 results with 91% gross margins and $163 million net income, but its stock trades at a forward P/S ratio of 15.9x, more than double Meta's, indicating a premium valuation. A recent article highlights AI data licensing as a potential growth driver, yet advertising still accounts for 94% of revenue, and user visits fell 5.4% month-over-month in September, signaling engagement volatility. The DeepValue report underscores that while data licensing could justify some optimism, the current P/E of 102 and valuation 232% above intrinsic DCF value reflect overexuberance amid competitive ad markets and advertiser concentration risks. Financially, Reddit maintains a robust $2.2 billion cash cushion, but free cash flow and earnings remain exposed to seasonal ad cycles and community-governance challenges. Overall, the company must prove it can scale new monetization levers while stabilizing user engagement to support its lofty valuation.

Implication

The high P/S ratio compared to peers like Meta suggests limited near-term upside unless Reddit can rapidly scale its AI data licensing, which remains nascent and unproven. Declining user engagement could pressure ad revenue growth, making it critical to monitor DAUq and ARPU trends for signs of stabilization or further erosion. Advertiser concentration risks, with top customers contributing 25% of revenue, heighten vulnerability to budget cuts or competitive losses in a volatile digital ads environment. While the strong cash position provides a buffer, execution missteps in community governance or data deals could trigger a sell-off, given the stock's premium pricing. Investors should wait for concrete evidence of durable monetization and engagement improvements before considering a position change from the current HOLD recommendation.

Thesis delta

The new data on user engagement decline and elevated P/S ratio reinforces the existing HOLD thesis by highlighting persistent overvaluation and operational fragility. No material shift occurs, but it emphasizes the need for proof in data licensing scale and advertiser diversification to justify current prices.