Reddit (RDDT) Stock Surges on Robust Advertising and User Growth

Reddit (RDDT) shares surged 7% in Friday trading following a stellar third-quarter earnings report that revealed impressive advertising growth and a significant beat on key financial metrics. The surge reflects growing investor confidence in the platform’s ability to monetize its engaged user base and capitalize on emerging revenue streams.

The social media platform reported a remarkable 68% year-over-year revenue increase, reaching $585 million, exceeding analyst estimates compiled by LSEG which had projected $546 million. Earnings per share (EPS) also impressed, coming in at 80 cents, well above the anticipated 51 cents. This performance underscores the effectiveness of Reddit’s strategic initiatives in attracting and retaining advertisers.

Looking ahead, Reddit anticipates continued momentum, projecting fourth-quarter revenue between $655 million and $665 million. This optimistic outlook surpasses Wall Street’s consensus forecast of $638 million, signaling strong confidence in the platform’s near-term growth trajectory.

Morgan Stanley analyst Brian Nowak noted, “These results speak to the company’s continued progress across its ad and platform initiatives.” He further emphasized the ample opportunities for expansion, highlighting the impressive 75% year-over-year growth in active advertisers and the potential for increased engagement from existing advertising partners. The growth illustrates Reddit’s strength in attracting diverse advertisers.

Reddit credited its success to strategic investments in automation, which have enhanced the return on advertising spending (ROAS). This technological advancement not only streamlines advertising processes but also empowers advertisers to optimize their campaigns for maximum impact. The company reported that nine of its top 15 advertiser verticals experienced growth exceeding 50%, highlighting the platform’s broad appeal across different industries and targeted audience segments.

Reddit’s daily active users (DAUs) reached 116 million, a 19% increase from the previous year, surpassing Wall Street’s estimate of 114 million. This substantial growth in user engagement validates Reddit’s continued relevance and attractiveness within the competitive social media landscape. The platform’s ability to foster thriving communities around diverse interests continues to be a strong driver of user acquisition and retention.

Reddit has been actively attracting users from Google’s search results, leveraging its unique content and community-driven discussions. Moreover, the platform generates increased advertising revenue from logged-in users, whose engagement tends to be higher and more targeted. However, the emergence of AI-powered chat applications, such as ChatGPT and Google’s AI Overview, has raised concerns about potential impacts on future user growth. The worry is that these AI tools could potentially curate and present information more efficiently, diverting traffic away from platforms like Reddit.

“I’m looking forward to continuing to work on these things with these partners, but they’re not a major traffic driver today,” CEO Steve Huffman stated during the earnings call. Huffman acknowledged the potential challenges posed by AI but expressed optimism about future collaborations and opportunities for growth.

Reddit reported a 7% increase in Daily Active Unique Users (DAUU), reaching 23.1 million, a slight deceleration from the 12% growth observed in the second quarter. Globally, the number of logged-in users grew by 14%, reaching 50.2 million, underscoring the platform’s expanding international reach and growing user loyalty.

Reddit’s “other” revenues, encompassing data licensing partnerships with entities such as Google and OpenAI, experienced a 7% year-over-year increase, reaching $36 million. These partnerships demonstrate Reddit’s ability to leverage its vast repository of user-generated data for AI training and other innovative applications, opening up new avenues for revenue diversification and strategic collaborations. The licensing arrangements reflect the intrinsic value of Reddit’s data in training advanced AI models and enriching other platforms.