Reddit (NASDAQ:RDDT | RDDT Price Prediction) just released its third-quarter earnings, and the numbers paint a picture of a company firing on all cylinders.
Revenue jumped 68% year-over-year to $585 million, beating analyst estimates by a wide margin. Advertising, which makes up the bulk of its business — it now accounts for 94% of total quarterly revenue — surged 74% to $549 million, driven by new ad formats and better targeting. Daily active users hit 116 million, up 19% from last year, with U.S. growth at 7%. Average revenue per user climbed 41% to $5.04, showing stronger monetization. Even the “other revenue” segment, mainly from content licensing deals with AI firms like Google and OpenAI, grew 7% to $36 million.
These results highlight Reddit’s ability to capitalize on its community-driven platform in a competitive social media landscape. Since Reddit went public in March 2024, I have been very skeptical of its stock as an investment, especially doubting its ad business as a reliable growth driver. Here’s why I got it so wrong.
Underestimating the Ad Machine
My initial doubts stemmed from Reddit’s user metrics. In early analyses, I highlighted how logged-in users were growing slower than logged-out ones, suggesting weak engagement that could hurt ad value.
For instance, in this year’s first quarter, logged-in growth was 23% versus 38% for browsers, making up just 45% of daily users. I argued this would limit advertisers’ interest, as non-engaged users don’t create content or interact deeply. But recent quarters show a reversal: logged-in users were growing at 30%, closing the gap.
Reddit’s investments in personalized feeds and subreddit recommendations have boosted stickiness, proving skeptics like me wrong on engagement as a barrier.
Missing the AI Revenue Surge
Another blind spot was dismissing Reddit’s content licensing as a minor side hustle. I viewed it as secondary to ads, unlikely to move the needle significantly. Yet, deals with AI giants have exploded. The Google partnership alone brings in $60 million annually, and new pacts with Meta Platforms (NASDAQ:META) and others push this stream toward 15% of total revenue.
Statista data shows Reddit cited in 40% of AI responses, far ahead of Wikipedia. I underestimated how large language models (LLMs) like ChatGPT and Perplexity crave Reddit’s authentic discussions for training. This “secret” revenue isn’t just padding — it’s diversifying away from ad cycles, something I downplayed in favor of warning about regulatory risks.
Overplaying Valuation Risks
High multiples were a red flag in my critiques. At one point, Reddit traded at 64 times 2026 earnings and 88 times free cash flow, which I called exorbitant for an unprofitable firm. I compared it unfavorably to established players like Meta, predicting sharp increases in volatility. But with consistent beats — earnings of $0.80 per share this past quarter, versus estimates of $0.55 — those multiples have compressed.
Profitability is arriving faster than I anticipated, with positive free cash flow in the last two quarters. I fixated on short-term risks like content moderation scrutiny, ignoring how Reddit’s niche communities create defensible moats against competitors.
Ignoring Broader Market Tailwinds
Broader trends also escaped my radar. The digital ad market, fueled by e-commerce recovery, grew 15% in 2025, but Reddit outpaced it thanks to formats like conversation ads. I worried about economic headwinds squeezing consumer spending, yet brands flock to Reddit for targeted reach in subreddits on everything from finance to gaming. User growth in international markets, up 31%, adds scale I undervalued.
Even my comparisons to X missed the mark — Reddit’s moderation tools have avoided the advertiser exodus seen there.
Key Takeaway
In my defense, I did begin to see the error of my ways this past summer, acknowledging Reddit’s AI licensing potential as a diversification play. While I’m not a raging bull on Reddit’s stock, my blind spot to its growth drivers made me overly cautious about the company.
Its valuation remains steep at 20 times sales, too high to buy in now, even with the momentum, so I’d still wait for a pullback. But I wouldn’t swear off the stock completely; it’s proven more resilient than I gave it credit for and could be a good addition to a long-term investor’s portfolio.
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