On July 31, social media platform Reddit (RDDT 1.71%) reported its most profitable quarter ever, with net income of $89 million. This boosted its trailing-12-month net income to $216 million, a monumental turnaround from one year ago, when its trailing-12-month net loss was more than $500 million. And it looks like the company is just getting started.
It's so tempting to dismiss Reddit stock as overvalued today. It's up more than 500% since it went public last year. That said, it is delivering on something very important -- something that many other promising technology companies have failed to show investors. And it's why Reddit stock could be a buy.
Image source: Getty Images.
Understanding the digital advertising space
There are many platforms that seek to monetize large user bases with advertising. And the opportunity for parabolic growth is enticing.
Think of it this way: Imagine a platform that has one million users but can grow to 10 million users. If it's generating $1 in advertising revenue per user and can keep generating $1 in the future, then this is a 10x opportunity, which is great on its own.
However, if this same platform can simultaneously go from generating $1 per user to $10 per user, then this is a 100x opportunity. This is what I mean when I say that there's an enticing parabolic growth opportunity in digital advertising: When both the user base and the monetization rate increase, the growth can be absolutely top tier.
Unfortunately for investors, many promising advertising businesses haven't lived up to hopes. Take Snap for example. It reported financial results for the second quarter of 2025 on Aug. 5, showing a 10% year-over-year drop for the pricing of its ads. To be sure, its user base has grown nicely over the years. But Snap's monetization has consistently disappointed.
The same could be said of other businesses outside of the social media space, including connected-TV business Roku. For its part, it doesn't break out monetization metrics as nicely, leaving investors to read between the lines. But in the company's recent second quarter, its platform revenue was up 18.3% year over year, whereas the number of hours streamed on Roku's devices was up 17.6%.
At first glance, this looks good for Roku: Its revenue growth outpaced the number of hours people watched TV. But not all of Roku's platform revenue is advertising revenue; there are other things that contribute to the total. Accounting for contributions from other revenue sources, it seems that Roku's ad pricing also slipped in spite of ongoing growth in its user base.
But Reddit is another growth story altogether.
Why Reddit stock is worth a look
In the second quarter of 2025, Reddit had 110 million daily active unique individual visitors, or "uniques," on its platform, which was up a nice 21% from the same quarter of 2024. But the company's average revenue per unique was up a whopping 47% to $4.53. Granted, some of this was due to growth in impressions -- visitors were shown more ads than in the past. But management confirmed that ad pricing was also up.
Ideally, management would have told investors how much ad pricing was up by. That would paint a clearer picture. But even though the image is blurry, investors can still see clearly enough to know that Reddit is succeeding where other promising tech companies have faltered: Ad pricing is going up.
The end result is parabolic growth: In the second quarter, Reddit's revenue was up a stunning 78% year over year to $500 million. Not only is the growth rate stunning, it's also been accelerating for almost two years now. In other words, it's actually living up to lofty expectations.
Management has also done a commendable job of keeping expenses in check lately. Consequently, the second quarter was the company's most profitable quarter ever.
Looking at Reddit stock now, it trades at nearly 24 times sales. Generally speaking, that's considered expensive. But it may be reasonable for long-term investors for three reasons.
First, Reddit is an extremely high-margin business, with a second-quarter gross margin of nearly 91%. It deserves a high sales valuation for this reason alone.
Second, the company's growth is superb, as mentioned. If it can keep better monetizing its audience, then it can grow into its pricey valuation.
Third, it still has a lot of room to improve its monetization. Consider that it has over 400 million weekly users -- this is one of the biggest platforms in the world. And it's still generated less than $1.7 billion in revenue over the last year, much lower than similarly scaled social media platforms such as Pinterest.
Reddit is executing well, and the stock could still be reasonably priced for investors with a five-year outlook. For these reasons, I believe the stock is a buy after its most profitable quarter ever.
