Reddit (RDDT +1.52%) went public in 2024, nearly 20 years after the social media site launched. The company has been slow to monetize its massive user base, but that effort is now kicking into high gear. Reddit generated $465 million in revenue from advertising in the second quarter, up 84% year over year, as it grew its user base and invested in its advertising platform. While the stock has already soared since the IPO, Reddit could be worth a lot more down the road, minting stock market millionaires in the process.
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The secret sauce
What makes Reddit special in the world of social media? Users turn to Reddit to find answers, product recommendations, and other information rather than to search engines. Out of Reddit's 416 million weekly active users in Q2, 70 million searched directly on Reddit, and 6 million used the company's artificial intelligence (AI)-powered Reddit Answers feature. Countless more undoubtedly tacked "reddit" onto their Google search query, knowing that Reddit would provide better information than generic search results.
Advertising is the main way Reddit generates revenue, and so far, filling the platform with ads hasn't driven users away. The number of daily active users jumped 21% year over year in Q2 to 110.4 million, with 11% growth in the U.S. and 32% growth in international markets. Reddit is undertaking a machine translation initiative to appeal to non-English speakers, which is helping to drive international growth.
For advertisers, Reddit is appealing because they can put their product or service in front of people actively searching for a solution. Reddit has been leaning into this fact, launching its shopping ads unit in Q2 to help brands advertise their products. So far, advertisers have realized a 100% improvement in return on ad spend by using the new ad unit, and the number of product catalogs hosted on Reddit has quadrupled over the past year.
NYSE: RDDT
Key Data Points
Room to grow
Reddit generated about $1.11 per weekly active user and $4.21 per daily active user in advertising revenue in Q2. Improving this monetization will drive overall revenue higher, as will continuing to attract new users to its platform.
For comparison, Meta Platforms generated about $13.36 in advertising revenue per daily active user in Q2 across all its apps, not just the heavily monetized Facebook and Instagram. Reddit has room to more than triple its revenue per daily active user before it catches up with Meta. Add in user growth, and Reddit should be able to grow revenue at a double-digit pace for a very long time.
Reddit's profits can grow even faster. The company managed a gross margin above 90% in Q2, and it produced positive net income of $89.3 million on $500 million in revenue. Operating expenses have grown along with revenue, but Reddit is doing a good job of keeping a lid on costs. The result is impressive profitability that should continue to improve as the company better monetizes its user base.
A pricey stock that's worth the cost
Reddit stock isn't cheap. Based on the average analyst estimate for fiscal 2025 earnings, shares of Reddit trade at a price-to-earnings ratio of roughly 117. That's certainly rich, but earnings per share (EPS) could explode over the next few years. Analysts expect EPS to surge by around 65% in 2026, for example.
Reddit's valuation introduces some risk, but the company's long-term growth potential more than makes up for it. Reddit will need to be careful not to push too many ads on users, which could drive them away, and the state of the global economy and the digital advertising market are wildcards that could impact growth. But all things considered, Reddit looks like a fantastic growth stock that could drive incredible returns for long-term investors.
