Reddit Stock Sees Steep Decline After Strong Q2 Earnings

Reddit’s stock took an unexpected hit after the company released its second-quarter earnings, despite posting better-than-expected results. The online forum’s shares plummeted more than 10% in the hours following the announcement, leaving investors wondering if the market has finally caught up with Reddit’s impressive growth story.

The numbers were solid, but it seems that even a strong quarter wasn’t enough to impress Wall Street. With revenue soaring 61% to reach $805 million and net income almost tripling to $283 million or $1.25 per share, one would think that the market would be celebrating Reddit’s success. However, the stock’s decline suggests otherwise.

Reddit has been on a tear for years, with its community growing at a double-digit year-over-year clip. The company now boasts an impressive 514.6 million weekly active unique visitors, representing a 24% jump from where it was just a year ago. Daily active uniques climbed 18% to 130.3 million, cementing Reddit’s position as a global juggernaut.

The ‘community of communities’ is growing its audience at a rapid pace, but its revenue growth is even more impressive. When Reddit went public in early 2024 with a share price of $34, it generated $804 million in revenue for all of 2023. Fast forward to the second quarter, and Reddit’s top line has grown by three times that rate, reaching an astonishing $805 million.

Reddit’s revenue gains are nothing short of impressive, but the story gets even better when looking at the bottom line. Net income almost tripled, skyrocketing 185% to $283 million or $1.25 per share. This marks a significant shift towards becoming a high-margin business, with a net margin of 31%. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) more than doubled to $343 million, representing a 43% adjusted EBITDA margin.

Free cash flow also saw a substantial increase, shooting up 135% higher to $261 million. Analysts were modeling only $0.96 in earnings per share, with 46% top-line growth. While Reddit’s beat was certainly impressive, it’s not entirely surprising given the company’s track record of consistently exceeding Wall Street’s profit targets.

Coming through with monster bottom-line beats isn’t an anomaly for Reddit; rather, it seems to be a default setting. For now, at least, the company continues to get better and better, despite its stock price taking a hit after the initial market reaction.

It wasn’t all good news, however. While Reddit’s numbers were solid, there are some concerns that need to be addressed. Daily active uniques outpacing weekly uniques would have been a welcome sign of improving engagement. Additionally, revenue growing much faster than the platform’s community may not be sustainable in the long run.

Reddit’s more than half a billion users don’t pay to use its rapidly expanding collection of subreddits. Like many popular free platforms, it relies on ad-supported revenue. However, Reddit also offers a lightly used premium tier and has another significant revenue stream: data licensing with leading AI platforms.

The company is paid by these platforms to scour its conversations for training and improving their models. This partnership remains a thin slice of the revenue pie but could provide some comfort to investors if renewals are completed on favorable terms. With 26 billion cumulative posts on Reddit, it’s the largest pool of realistic, human conversations available to help train AI models.

Finally, Reddit’s new guidance calls for 47% to 49% growth in the current quarter. If investors were selling the stock today due to fears that the two-year streak of exceeding 60% quarterly top-line increases is over, they might want to revisit what Reddit said three months ago. The company was only forecasting 43% to 45% revenue growth for the second quarter, and reality proved substantially kinder.

Reddit’s shares were already trading at a discount when the stock price was higher and forward profit targets were lower. With a multiple of 27 times next year’s Wall Street earnings forecasts, it seems that Reddit is still underpriced despite its impressive growth story.