Reports that Reddit (RDDT) may restrict Google’s access to its content for AI training have pushed the company’s US$60 million a year licensing deal into focus for investors.

The share price reaction to the Google licensing headlines has been sharp, with Reddit’s 1 day share price return down 8.32% and 7 day share price return down 13.96%. At the same time, the 90 day share price return of 11.39% and 1 year total shareholder return of 16.62% point to earlier momentum that has recently cooled.

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Reddit now trades about 33% below the average analyst price target and around 52% below one fair value estimate, even after its AI deal headlines. Is this discount caution well placed, or has the pullback gone too far?

Most Popular Narrative: 45% Undervalued

Compared with Reddit’s last close at $170.38, the most followed narrative pegs fair value at about $309.77, implying a large valuation gap in that view.

Future revenues will grow substantially as user DAU accelerates the number of ads shown. I have set a yearly growth rate of 40% which may diminish in 3-5 years but may be undervalued currently. While future PE comes down in line with FB at around 35. This gives an overall valuation about $300 per share.

Want to see how this Reddit narrative stretches current earnings into that higher fair value range? The key ingredients are rapid top line expansion, rising margins and a richer future profit multiple baked into the model.

Result: Fair Value of $309.77 (UNDERVALUED)

However, this Reddit narrative could be challenged if user engagement slows, or if AI data licensing and advertising demand turn out weaker than current expectations suggest.

Another View: Reddit Through the P/E Lens

The user narrative paints Reddit as 45% undervalued, but the current P/E of 46.4x sends a different signal. It is higher than both the peer average of 29.3x and the US Interactive Media and Services industry at 15.8x, and also above a fair ratio of 32.5x, which suggests valuation risk if expectations slip.

For a closer look at what this gap could mean if the market gravitates toward that fair ratio over time, have a look at the See what the numbers say about this price — find out in our valuation breakdown.

Next Steps

This mix of enthusiasm and concern around Reddit’s valuation invites you to check the numbers yourself and decide how they stack up for you, then weigh those figures against the 3 key rewards.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.