Why Reddit Stock Just Popped

Investors in Reddit (NYSE: RDDT) stock are having a terrific Tuesday, as shares rise 10.7% through 11:10 a.m. ET.

Shares of the social media discussion site, which had more than quadrupled since its initial public offering (IPO) last year, topping $225 in early February, have been cut in half over the past month. That 50% haircut, however, has made Reddit stock "extremely attractive" for new investors according to investment bank Loop Capital, as The Fly reports this morning.

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Loop opens a new discussion on Reddit

Reddit stock trades just below $118 today, down about 48% from what it cost a month ago. Loop Capital, however, is sticking with its buy recommendation, and says Reddit is worth at least $210, implying the stock has more than 78% upside from current prices.

Why does Loop think this? Advertising, mainly.

Better ad tools will put more ads on comments pages, and could attract more advertisers, driving better average revenue per user, or ARPU, says Loop. This year alone, investors could see Reddit grow its revenue 36%, and its earnings before interest, taxes, depreciation, and amortization (EBITDA) could soar 87%.

Is Reddit stock a buy?

Is that enough to make Reddit stock a buy, though? That shouldn't be too hard to figure out, because the math here is actually pretty simple.

Reddit stock is worth $21.3 billion after today's run-up, and while the company doesn't have any net income yet, it did generate $216 million in positive free cash flow (FCF) last year. That works out to a price-to-free-cash-flow ratio of 99.

That's not a cheap price at all, but it might not be too expensive if Reddit can grow FCF at anywhere near the rate Loop projects for EBITDA growth. In fact, according to S&P Global Market Intelligence data, most analysts expect Loop to more than double its FCF this year, then double it again over the next two years. Long story short, therefore, there is a good argument to be made that Reddit stock is a buy.

Should you invest $1,000 in Reddit right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.