Reddit stocks surge as AI-intensive advertising strategy draws Wall Street plaudits

Reddit stock climbed 15% Friday after it revealed its second-quarter results, with revenue up 78% year-over-year to about $500 million and EPS hitting $0.45, far surpassing Wall Street expectations. 

Most Wall Street analysts were impressed by the company’s ad business, seeing that AI-based advertising and rising user numbers largely drove its revenue growth.

Reddit’s daily active user count grows despite Google traffic

The company saw an 84% jump in ad revenue and a 21% increase in daily active users to 110.4 million, boosted by international growth and AI-driven search, which now generate 70 million weekly queries.

Analysts claim its rising daily active user builds investor confidence in the platform’s “long-term growth narrative”. Analysts at Piper Sandler even noted that while fluctuating Google traffic was a challenge in Q2, Reddit’s US daily active user count grew, showing the platform’s distinctive content holds value for both Google and its users.

The firm also reported a 24% annual increase in alternative revenue streams, like its data licensing business, totaling $35 million. 

The discussion forum has been intensifying its focus on AI-enhanced ads. It uses its community-sourced data to power tools like Reddit Insights and Conversation Summary Add-ons, which are featured in the new Community Intelligence suite and help brands mine discussions for marketing value. The firm’s acquisition of Memorable AI in 2024 also strengthens its positioning as an ad-tech player.

The company has projected that its Q3 revenue will range from $535 million to $545 million, topping the average analyst estimate of $473 million, per LSEG figures. Danni Hewson, head of financial analysis at AJ Bell, acknowledged that Reddit’s decoding of user intent through real community interactions could open up more monetization prospects, hinting that the firm could reach its target.

He further commented, “Being able to home in on exactly the kind of consumer who might be open to splurging on what a seller offers has made sites like Reddit hugely popular with advertisers.”

Reddit plans on expanding its conversational AI tool

Though still recent, Reddit’s content licensing deals with Google and OpenAI have already generated a stable revenue stream in the second quarter, hinting at meaningful long-term value.

Since launching in December, Reddit Answers—a conversational AI tool—has also experienced strong user growth, increasing from 1 million to 6 million weekly users over the past quarter.

According to CEO Steve Huffman’s message to shareholders, Reddit is focused on weaving the tool further into its search framework to position search as a core component of the platform. He added that the company could grow to a search hub, offering a special kind of knowledge and conversation breadth that cannot be found on other platforms.

Reddit Answers is already deployed in 12 countries and is eyeing global expansion. The company eventually plans to merge it with core search functionality and make the search bar more visible in the app’s design. 

So far, the company is valued well above its peers, trading at 74.57 times its estimated earnings for the next year, compared to 19.39 for Pinterest and 27.54 for Snap.

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