Reddit shares surge after earnings beat expectations, boosted by robust forecast

Reddit, the social media platform known for its diverse communities and user-generated content, released its third-quarter earnings report, exceeding expectations and sending shares soaring in after-hours trading. The company’s performance highlights a strategic shift towards monetization and user engagement, particularly leveraging its unique data assets in the burgeoning AI landscape.

The headline figures against LSEG estimates painted a positive picture:

• Earnings per share: 80 cents vs. 51 cents expected
• Revenue: $585 million vs. $546 million expected

Revenue growth was robust, jumping 68% year-over-year, driven by strong performance in advertising and, increasingly, data licensing. Net income surged to $163 million, a significant improvement over the previous year’s $30 million. Looking ahead, Reddit anticipates fourth-quarter sales in the $655 million to $665 million range, surpassing the Wall Street consensus of $638 million. Adjusted earnings are projected between $275 million and $285 million, exceeding StreetAccount’s estimate of $259 million.

A key metric for Reddit’s financial health is average revenue per user (ARPU). In the third quarter, global ARPU reached $5.04, exceeding analyst estimates of $4.82. U.S. revenue stood at $480 million, above the StreetAccount estimate of $445 million, while international revenue reached $105 million, slightly above the projected $104 million.

The “Other revenue” category, which encompasses Reddit’s data licensing business, saw a 7% year-over-year increase to $36 million. This segment is gaining strategic importance, as companies like Google and OpenAI are actively licensing Reddit’s data to train their AI models. This represents a significant opportunity for Reddit to diversify its revenue streams and capitalize on the growing demand for high-quality training data in the AI industry. The company’s vast library of user-generated content and community-driven discussions provides a unique and valuable dataset for AI developers. The strategic partnerships with these companies positions Reddit at the forefront of AI development. However, the rise of AI also brings challenges. Reddit’s logged-in DAUq for the U.S., its most lucrative region, only rose 7% year-over-year. This slowdown is partially caused by Google’s AI Overview, which provides summaries to search questions, thus, decreasing traffic to Reddit.

Daily active uniques (DAU) also showed positive momentum, with global DAU increasing 19% year-over-year to 116 million, exceeding analyst estimates of 114 million. However, the growth rate of logged-in DAU in the U.S. slowed for the fifth consecutive quarter, rising 7% year-over-year to 23.1 million. This suggests that while Reddit’s overall reach is expanding, converting casual users into active, logged-in participants remains a challenge.

During the earnings call, Reddit CEO Steve Huffman addressed concerns about the potential impact of AI-powered chat applications on Reddit’s traffic. Huffman stated that the company is not currently seeing any major traffic diversion but acknowledged the potential for future collaboration and integration with AI platforms. Huffman also emphasized the company’s focus on improving user experience to encourage more users to create accounts and actively engage with the platform. Key strategies involve streamlining the onboarding process and ensuring users are easily connected with relevant content based on their interests.

Reddit Chief Operating Officer Jen Wong highlighted the company’s increasing investment in performance-marketing campaigns, particularly in international markets where brand awareness is lower. These marketing initiatives aim to drive app installs and increase brand consideration, laying the groundwork for future growth. The company saw success with brand campaigns, and will look to replicate the success in the future.