Reddit shares skyrocketed as much as 16% in after-hours trading yesterday after the social media company impressed Wall Street with its first earnings report since going public in March. It lost some of these gains this afternoon, but it’s still up significantly on the day.
Better-than-expected revenue growth and an upbeat forecast for its upcoming quarter were the main cause of this uptick as investors appear to believe that the platform’s monetization efforts will continue to yield positive results in the near future.
These are The Numbers That Prompted the Rally
For the first quarter ended March 31st, Reddit reported the following key data:
- Revenue: $243 million, up 48% year-over-year and beating Wall Street’s expectations of $212.8 million.
- Net Loss: $575.1 million. A narrower-than-expected loss compared to FactSet’s consensus estimate of $614.8 million for the period.
- Adjusted EBITDA: $10 million profit vs $50.2 million loss in Q4 2023.
The $243 million quarterly revenue represented a huge beat, with ad revenue alone coming in at $222.7 million resulting in a 39% year-over-year. This indicates that Reddit’s advertising business is growing faster than that of internet giants like Meta Platforms (META), Amazon, and Google during the same period.
Meanwhile, Reddit’s 48% year-over-year revenue growth rate showcased how rapidly brands are flocking to leverage the platform’s highly engaged communities of passionate users across over 100,000 interest-based subreddits and discussion forums.
AI Deals and User Economy Are Reddit’s Secret Sauce to Future Success
While Reddit has relied almost entirely on advertising to generate revenue in the past, the company made waves when it revealed that it brought in $203 million worth of data licensing deals with AI companies like Google in the lead-up to its initial public offering (IPO).
During the Q1 earnings call, Reddit’s co-founder and CEO Steve Huffman signaled that there was strong interest from AI companies in striking further data-sharing deals to use Reddit’s trove of user-generated content for training their large language models (LLMs). This makes sense because Reddit has an incredibly valuable repository of content spanning just about every topic you could ever imagine.
“Reddit has cultivated a diverse and loyal audience that advertisers covet,” said Jeremy Goldman, the senior director of eMarketer. “But the real money printer here is Reddit’s AI data licensing deals.” These AI companies would use this data to train AI models, entirely avoiding the copyright hurdles that are plaguing top LLMs like ChatGPT’s GPT-4.
In Q1 2024, Reddit booked $20 million in high-margin data licensing revenue and Huffman indicated that deal momentum is growing.
“Reddit is still early in its monetization journey, I’m proud of what we have achieved to-date with our advertising business and our new and emerging businesses in data licensing and user economy,” highlighted Jen Wong, Reddit’s Chief Operating Officer during this morning’s earnings conference.
Huffman also expressed optimism around Reddit’s ambitions to build out a “user economy” where users can increasingly make money directly through subscriptions, digital gifts, avatars, and other emerging monetization models.
“I think the next biggest business model for us is what we call the user economy, so this is users making money from other users on Reddit,” Huffman said.
User Growth and Engagement is Growing at a Fast Pace
The bullish tone regarding Reddit’s efforts to diversify its revenue streams was amplified by evidence of robust user growth and engagement during the quarter. These were some of the most notable figures shared in the report:
- Daily active unique visitors jumped 37% year-over-year to 82.7 million.
- Average revenue per user (ARPU) increased by 8% to $2.94 compared to a year ago.
“It was a strong start to the year and a milestone quarter for Reddit and our communities,” Huffman emphasized. “We see this as the beginning of a new chapter as we work toward building the next generation of Reddit.”
Blockbuster Q2 Guidance Sparks Buying Frenzy
Perhaps the biggest catalyst fueling Wednesday’s jump in the price of Reddit stock was the company’s guidance for the current second quarter, which blew past analyst expectations.
For Q2 2024, Reddit management expects to see the business bringing in between $240 million and $255 million. This figure exceeded by roughly 7% Wall Street’s consensus estimate for the period of $223.8 million. Meanwhile, the midpoint suggests around 32% year-over-year revenue growth, an incredible figure for such a large company.
Analysts cheered this strong Q2 guidance and various financial services firms went on to raise their Reddit price targets upon suggesting that the social platform’s journey to scale its ad business is still in the early innings.
“Reddit remains in the early days of developing its ads business,” said Piper Sandler analysts, who also noted that the company has a “large international user opportunity [that] remains untapped.”
Meanwhile, Bernstein’s Mark Shmulik was even more bullish. He said: “We suspected that Reddit would come out strong out of the gates, and Reddit exceeded our bullish expectations.”
He added: “Reddit appears to be reaping the benefits of a strong digital ad market, buoyed by some ‘free’ IPO marketing, alongside increased traffic courtesy of their new favorite AI partner Google.”
Reddit Shares Experience Sizable Uptick in Pre-Market Action but Settle Much Lower During Regular Session
In the wake of Reddit’s positive Q1 performance and bright outlook, at least 7 analysts raised their price targets on the stock as of Wednesday morning – pushing the average forecast to more than $55 according to LSEG data. That’s well above the $34 price at which Reddit chose to offer its shares when it went public back in March.
This wave of upgrades and optimism unleashed a buying frenzy, driving Reddit shares up to nearly $58 per share in pre-market stock trading activity on Wednesday. However, the stock is settling with much lower gains of 3.6% as of this afternoon at $51.20 per share.
Also read: 100+ Social Media Statistics Updated for April 2024
While Reddit remains dwarfed by larger internet titans like Meta Platforms and its massive $1.2 trillion market cap, today’s explosive rally suggests that investors are betting big that the company’s unique value proposition, business model, and new AI licensing revenue stream can help turn it into an advertising and AI juggernaut as well.
With momentum at its back, Reddit and its hordes of passionate retail investor followers will look to keep the market’s bullish sentiment charged up by continuing to deliver blockbuster operating results in the coming quarters. But after its stellar public debut, Reddit has clearly arrived as a preeminent social media platform that markets cannot ignore.
Reddit may capitalize on this positive momentum to keep expanding its portfolio of AI licensing deals by approaching more companies as they have proven that they can deliver valuable intel to AI labs seeking to train their models on its vast datasets.