Reddit (NASDAQ:RDDT) recently reported its third-quarter earnings, showcasing impressive growth across multiple key metrics. The company’s revenue soared by 68% year-over-year to $585 million, surpassing analyst expectations by a significant margin. Advertising revenue, which comprises 94% of Reddit’s total quarterly revenue, surged by 74% to $549 million, fueled by new ad formats and enhanced targeting strategies. The platform also experienced a 19% increase in daily active users, reaching 116 million, with U.S. growth at 7%. Average revenue per user saw a substantial 41% increase to $5.04, indicating improved monetization efforts. Additionally, the “other revenue” segment, primarily generated from content licensing agreements with leading AI firms like Google and OpenAI, grew by 7% to $36 million.
These robust financial results underscore Reddit’s ability to leverage its community-driven platform in a competitive social media landscape. Despite my initial skepticism towards Reddit’s stock as an investment after its IPO in March 2024, the company has evidently defied expectations, particularly in terms of its ad business as a key growth driver.
One of my initial concerns revolved around Reddit’s user engagement metrics. I had previously highlighted the disparity between logged-in and logged-out user growth rates, indicating potential challenges in ad value. However, recent quarters have shown a significant improvement, with logged-in user growth accelerating to 30%, bridging the previous gap. This shift can be attributed to Reddit’s investments in personalized feeds and subreddit recommendations, which have enhanced user stickiness and engagement levels.
Another aspect that I underestimated was Reddit’s content licensing initiatives. Initially perceived as a secondary revenue stream compared to advertising, these partnerships with major AI companies have proven to be lucrative. For instance, the collaboration with Google alone generates $60 million annually, with additional agreements with Meta Platforms and others contributing to a growing revenue share. Reddit’s unique position as a valuable source of authentic discussions for training language models has positioned it as a sought-after partner for AI firms, amplifying its revenue diversification efforts beyond ad revenue cycles.
While my concerns regarding Reddit’s high multiples and profitability timelines have been somewhat mitigated by consistent earnings beats and positive free cash flow in recent quarters, I still maintain caution towards its current valuation of 20 times sales. Despite its impressive performance, I would advise waiting for a potential pullback before considering an investment in Reddit’s stock. However, the company’s resilience and continued growth trajectory suggest that it could be a compelling addition to a long-term investor’s portfolio.
In conclusion, Reddit’s third-quarter earnings showcase its evolution into a formidable player in the digital advertising space, driven by robust user engagement, innovative ad formats, and strategic partnerships in AI content licensing. While my initial skepticism towards Reddit’s growth drivers has been challenged by its recent performance, prudent evaluation of its valuation and market dynamics remains crucial for prospective investors.
