Reddit has reported robust first-quarter revenue of $663 million, surpassing analyst estimates of $610.9 million, marking a 69% year-over-year increase. The company also provided a strong second-quarter revenue forecast of $715 million to $725 million, exceeding the LSEG-compiled average estimate of $711.6 million. Additionally, Reddit anticipates adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be between $285 million and $295 million, above the $277.1 million estimate. This positive outlook is largely attributed to its AI-powered advertising tools, which enable advertisers to target users based on interests and sub-communities within the platform.
Performance advertising, designed to drive measurable actions like purchases and sign-ups, accounted for over 60% of Reddit's total ad revenue. Daily active unique visitors increased by 17% to 126.8 million, and global average revenue per user saw a significant 44% rise. The active advertiser count grew by 75% year-over-year for the third consecutive quarter, indicating strong advertiser engagement. Reddit’s strategy appears to be paying off, positioning it favorably against competitors such as TikTok, Meta's Instagram, and Facebook, even amidst geopolitical uncertainties.
Despite the strong financial performance, Reddit faces challenges regarding its data licensing agreement with Google. The two companies are renegotiating a $60 million-a-year deal, with Reddit seeking usage-based fees due to concerns about Google using its content for AI Overviews, potentially diverting traffic. Reports that Reddit considered restricting Google's access to its content caused a 9% stock drop. Analysts from RBC Capital Markets and Wells Fargo have warned that severing the deal could negatively impact growth, revenue, and valuation, with a potential $500 million hit to AI licensing revenue, while DA Davidson cautioned about possible effects on daily active user growth.
KeyBanc initiated coverage on Reddit with an 'Overweight' rating and a $225 price target, seeing significant upside. They project revenue of $3.24 billion in 2026, $4.30 billion in 2027, and $5.46 billion in 2028, with EBITDA expected to rise from $1.43 billion to $2.73 billion over the same period. KeyBanc believes Reddit's content is becoming increasingly valuable for large language models and AI training, making it a unique way to invest in AI growth. However, they also flagged risks such as the potential for other ad platforms to experience growth plateaus and the ongoing public negotiations with Google as a near-term overhang.
