Reddit’s Tumble Has Been Overdone After It Produced Strong FCF
A hand holding a phone with the Reddit logo_ Mamun_Sheikh via Shutterstock_ Reddit, Inc. (RDDT) generated a strong Q2 FCF margin (32.4%) – see page 21 of its shareholder letter. And for the trailing 12-month (TTM) period, its FCF margin was 36.7%, with very little capex. So why did RDDT stock tumble 20% on Friday?…
A hand holding a phone with the Reddit logo_ Mamun_Sheikh via Shutterstock_
Reddit, Inc. (RDDT) generated a strong Q2 FCF margin (32.4%) – see page 21 of its shareholder letter. And for the trailing 12-month (TTM) period, its FCF margin was 36.7%, with very little capex.
So why did RDDT stock tumble 20% on Friday? That was too much, and value investors knew this. So, on Monday it was up 10%. It could still be worth over 40% more.
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RDDT closed at $154.71, but that’s still below the $178.04 July 30 closing price, right before Reddit’s July 30 earnings release after the market close. And it’s still off 23.9% from the July 14 peak of $203.27.
RDDT stock – last 3 months – Barchart – Aug. 3, 2026
But it could be worth $217 per share (+40.3%) over the next 12 months (NTM). This article will show why.
Strong FCF Margins
The stock probably fell 20% on Friday because Reddit’s FCF dropped from $311.16 million (a 46.9% FCF margin) to $260.74 million (a 32.4% FCF margin).
However, as the table below shows, this still left the company with $571.9 million FCF during the first half of 2026 (a 38.9% margin).
Reddit, Inc. Q2 and H1 FCF margins – see page 21 of Shareholder letter
Moreover, StockAnalysis.com shows that over the last year, its TTM FCF was over $1 billion ($1.019b) for a 36.66% FCF margin. These are truly impressive margins.
And that’s not it. The table above shows that it generates this with very little capex.
The bottom line is that value investors love this.
And since analysts have significantly higher revenue forecasts, it implies that FCF could rise a great deal. Let’s look at that.
Forecasting FCF
Right now, Seeking Alpha projects $3.38 billion in 2026 revenue and $4.22 billion for 2027.
That implies a 52.7% rise this year and 24.85% next year. If margins stay stable, FCF could soar.
For example, using the trailing 12-month (TTM) 36.66% FCF margin:
2026: $3.38b x 0.3666 = $1.239b FCF
2027: $4.22b x 0.3666 = $1.547b FCF
NTM: Average ………… $1.393 billion FCF
That’s 36.7% higher than the $1.019 billion it generated over the past year.
In other words, FCF could soar. That’s why the 20% drop on Friday was overdone. Let’s look at that.
RDDT Fair Market Value and Price Targets
For example, Reddit’s FCF yield has been about 3.33% (i.e., 30x FCF) since its market cap is $29.783 billion according to Yahoo! Finance:
$1.019b TTM FCF / $29.783b = 0.0342
So multiplying the $1.393 billion in NTM FCF by 30x = $41.79 billion fair market value (FMV).
That’s 40.3% higher than its present market value, and implies the price target is 40.3% higher than Monday’s close of $154.71:
$154.71 x 1.403 = $217.06 PT
Wall Street agrees. For example, 34 analysts have an average PT of $218.17 according to Yahoo! Finance. Moreover, Barchart’s survey price average is $219.34, and AnaChart’s survey of 21 analysts is $234.15.
The bottom line is that Wall Street’s average PT is $223.89, or 44.7% higher than Monday’s close of $154.71.
That shows that analysts and value investors love RDDT stock.
Moreover, one conservative way to play it is to short lower-strike put options. That way, an investor can set an attractive potential buy-in point, and also get paid while waiting.
Shorting RDDT Puts
Look at the September 4 options expiry period. It shows that the $140.00 put option contract has an attractive midpoint premium of $5.60.
That strike is 9.5% lower than Monday’s close, implying that a short seller of this put contract could make a one-month yield of 4.0% (i.e., $5.60/$140 = 0.04).
RDDT puts expiring Sept. 4 – Barchart – As of Aug. 3, 2026
The investor just has to post $14,000 as collateral to buy 100 shares at $140.00. The account will immediately earn $560.00.
So, even if RDDT drops 9.5% to $140.00, the investor’s net breakeven cost will be just $13,440 for the 100 shares (i.e., $134.40 breakeven price, or $20.31 below Monday’s close). That is 13.1% downside protection on top of the 4.0% one-month yield.
So, you can see why shorting these puts is very attractive to value investors.
In fact, some investors might want to short an “at-the-money” strike price. That way, there is a better chance of being assigned to buy 100 shares.
For example, the $150.00 short-put play, 3.04% lower, has a $9.65 midpoint premium. That gives the investor a one-month yield of 6.36% ($9.65/$150.00).
If the investor repeats this play each month for 6 months, the expected return (ER) is over 38%. That compares with just holding RDDT stock and seeing it rise to the 40% higher price target.
The bottom line is that shorting puts is an attractive way to play RDDT stock, which is deeply undervalued.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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