Reddit

Reddit reported second-quarter financial results, which included sales growing 61% and adjusted EBITDA margins expanding 920 basis points. Shares fell after hours, likely due to flat sequential US user growth and continued search referral headwinds.

Why it matters: Reddit's monetization engine remains firmly intact, as its ad tech improves and more advertisers adopt the platform. These monetization improvements drove the global average revenue per user 36% higher to $6.18. However, this strength was juxtaposed by US daily active users, or DAUs, which were essentially flat sequentially. Search referrals were volatile this quarter, driven by Google's shifting search algorithm and AI overviews affecting logged-out web traffic. We expect medium-term growth to be driven by higher ad loads and better ad targeting rather than rapid US user additions.

The bottom line: We maintain our $200 fair value estimate for narrow-moat Reddit. Our valuation is underpinned by continued monetization gains. Following the post-earnings sell-off, we now view the stock as undervalued. At the same time, however, the pressure in US DAUs and limited visibility into search traffic prevents us from increasing our near-term growth estimates, despite this quarter's strong financial results.

Bears say: US user growth has petered out, as evidenced by flat sequential DAUs despite higher product and market investments to grow US users. If AI platforms reduce referral traffic to Reddit, without sufficiently compensating through data licensing renewals, Reddit may struggle to capture the full value of its content. AI-generated content and AI overviews increasingly capture search queries without directing users into Reddit's ecosystem. Overall, if this bear thesis plays out, we would see our fair value closer to $150, around 25% below our estimate.

Management expects third quarter revenue of $865 million and adjusted EBITDA of $390 million, both at the midpoint. While this implies a sales deceleration from above 60% in the past couple of quarters to 48% in the next quarter, we see this as a natural transition and lapping difficult comparisons rather than a structural deterioration in Reddit's ad business.

We see Reddit as a primary beneficiary of advertisers seeking high-intent ad products and authentic human content to boost their presence. Reddit's ad tech investments are delivering higher ad efficiency and also helped bring its eighth consecutive quarter of over 60% top-line growth. We believe these results are strong evidence that Reddit's monetization opportunity still remains underpenetrated.

Our fair value estimate for Reddit is $200 per share, implying a 2026 enterprise value/sales multiple of 11 times and an enterprise value/adjusted EBITDA multiple of 26 times.

We forecast Reddit’s revenue will grow at a 30% compound annual growth rate for the next five years, with a healthy mix of user growth and improved monetization driving top-line expansion.

On the user growth side of things, Reddit’s SEO strategies, platform improvements, and ML-driven translation are enabling expansion into international markets. We have seen this play out well when the French translation was rolled out, after which the company saw a healthy uptick attributable to new French users. The firm’s approach to using AI/ML to enhance content discovery and content recommendations should help user engagement and interactions. We believe this strategy to improve the user experience will help convert MAUs to DAUs and logged-out users to logged-in users. As such, we model DAUs to increase from 121 million in 2025 to well over 200 million by 2030.

We attribute global ARPU growth (which we project to increase from $18.14 in 2025 to roughly $33 in 2030) to a combination of monetization strategies. First, there is a significant opportunity to increase ad loads—the frequency of ads being displayed—which are currently half as light as peers. In addition, we see Reddit’s ad inventory—the space available to show ads—as nascent, and the company has sufficient bandwidth to grow the auction density. Second, Reddit’s focus on improving ad relevance and better targeting should boost click-through rates and overall ad pricing. Third, the company’s push to expand down funnel, which involves developing performance advertising products, should attract the conversion-focused advertisers who generally boast huge ad budgets.

On profitability, we expect Reddit to materially improve its operating margins over the next five years. In the short term, we expect margins to remain pressured from rising hosting costs and setting up infrastructure to handle richer media like image and video. Over time, we expect controlled headcount growth, operating discipline, and scalable ad-tech infrastructure to support strong operating margins. Our model points to non-GAAP operating margins of 46% in 2030, up from 38% in 2025. Higher-margin data licensing products should provide a nice upside to profitability as well.

We would highlight that Reddit’s strong monetization potential may be masking the emerging user growth problem in Reddit’s most monetizable geography. We believe the bear case is investors viewing that US DAU growth has hit a ceiling, without any signs of reacceleration. The other fear is that search referral erosion is more of a structural than cyclical issue, as search engines transition from the 10 blue links to AI-generated summaries. As Google and OpenAI increasingly summarize Reddit content directly on search pages, the worry is that logged-out traffic will evaporate, thus reducing the core funnel for new user acquisition. Finally, the uncertainty around data licensing renewals has also caused investor concern. With key agreements up for renewal in late 2026 and early 2027, investors worry that the contracts will either not be renewed or be structured in ways that prevent Reddit from capturing the full economic value of its content. All of the above would validate our bear thesis and prompt us to materially reduce our fair value estimate.

We believe Reddit merits a narrow economic moat, as the firm has displayed a network effect among its users and has begun to compile valuable user data, or intangible assets. Reddit competes with various digital advertising companies like Alphabet, Meta, Pinterest, and Snap, yet we believe its distinctive platform will enable it to secure an increasing share of advertiser budgets. We anticipate that strong user growth coupled with ongoing improvements in ad-targeting will help the firm monetize its network, thus allowing it to generate returns exceeding its cost of capital over the next decade.

Reddit is a community-driven platform centered on shared interests rather than personal networks. Users participate anonymously in more than 100,000 specialized communities, or “subreddits,” where they post content, discuss topics, and seek advice. Community voting determines which posts gain visibility, while volunteer moderators keep discussions relevant. This structure helps users discover information and connect with others who share their interests, strengthening the network.

Reddit, like other social media platforms, operates on an advertising-based revenue model, with a substantial 100-million-plus daily active user base that includes many unique visitors, of which more than half were not active on TikTok, X, and Snapchat. From an advertiser’s perspective, the limited overlap between Reddit's user base and those of other social media platforms means they can leverage Reddit for digital marketing initiatives targeting a differentiated user base.

First, the platform’s niche communities, subreddits, enable hypertargeting outreach since audiences have already self-selected the subreddit they want to join based on their interests, thus allowing brands to deeply engage with audiences, ensuring the right person is receiving the relevant ad. This context and interest-based advertising approach is particularly valuable, with many Redditors reporting engaging with recommended content, and a large proportion of users pay more attention to ads on Reddit than other websites.

Second, Redditors value organic conversation and peer recommendations, meaning that sponsored posts resonate best when they feel like a natural part of the conversations. This makes brand promotions feel less intrusive and more like extensions of conversations already taking place within the communities.

Third, unlike other social media, people often visit Reddit with a purpose, whether it be seeking information, advice or product recommendations. This intent-driven usage allows brands to connect with potential customers who are already in a discovery mindset, reaching them at the moment they’re open to finding new products or solutions. Brands benefit from these high-intent environments where most users consider Reddit a trustworthy source for product information and actively research purchase decisions.

Much like other moaty social media players, network effects arise from increased content on Reddit, which drives growth in users, and the addition of a new user and increased engagement per user make the network more valuable, creating a flywheel effect. As the firm seeks to monetize this network, we see two key drivers. One, the firm can improve ad targeting, making its ads more effective and pushing the return higher. In return, the social media firm can command higher prices per ad. Two, the social media platform can increase ad inventory, providing advertisers with more real estate on which to leverage different ad types.

Both of these actions yield the same net result—an increase in the firm’s average revenue per user as more ad dollars flow to its platform. Reddit’s enhanced ad formats and algorithm improvements are driving meaningful growth in monetization metrics. Reddit has been steadily improving its advertising capabilities. For example, in the US, the ARPU reached $34.01 in 2025, up from $15.55 in 2021. We anticipate further ARPU gains as Reddit expands its lower funnel and performance-based ad products, leverages AI-driven targeting capabilities, and better monetizes international markets.

We don’t view digital advertising as a winner-takes-all arena. In fact, we believe advertisers are continually diversifying their spending across a range of digital and traditional channels to reach a broader audience. While Meta and Google do own a substantial share of the digital advertising market, advertisers are increasingly seeking alternative platforms to connect with distinct audience segments and maximize campaign effectiveness.

We view intangible assets as a moat source, stemming from access to data regarding user behavior, which can increase advertisers' return on investments, thus increasing their willingness to pay. As more users engage across Reddit’s specialized subreddits, the quality of discussions improves, enhancing user retention and generating better data insights for advertisers. This attracts a diverse set of advertisers and boosts ad revenue, which allows Reddit to reinvest in product innovation such as AI-based content recommendations and enhanced search capabilities. We believe Reddit’s community-driven platform strengthens its network effect through valuable intangible assets, stemming from the company’s accumulation of valuable user data, which we think will soon be enhanced by increased video content and user engagement. Additionally, Reddit’s extensive archive of authentic user interactions positions it for future growth in both advertising and data licensing.

Overall, we believe that Reddit has established a strong niche within the large digital advertising market. As the company continues to widen its user base, enhance engagement, and optimize ad monetization, we expect its presence to expand across the broader advertising landscape. We anticipate that these factors combined will enable Reddit to generate returns above its cost of capital over the next decade.

Reddit’s improved web platform, better ML-powered translation, and content recommendations will drive expansion into international markets, helping boost user growth

Reddit has significant headroom to grow monetization through expanded ad formats like search and video, increasing ad load and improving ad targeting capabilities

Reddit’s vast repository of user-generated data is highly attractive for training LLMs and social listening, making it an increasingly valuable source to leverage as demand for high-quality conversational data grows

A large amount of traffic stems from Google search, making Reddit vulnerable to any unpredictable Google algorithm changes

Increasing competition from larger players (Meta, TikTok, YouTube) to develop superior AI-based ad targeting tools could marginalize Reddit’s appeal to advertisers

Reddit’s struggle to convert casual browsers (MAUs) into regular users (DAUs) limits its ability to command premium ad rates