Reddit, Inc. (NYSE: RDDT) experienced a sharp sell-off on Friday, with shares closing at $140.67, down 20.99% for the session. The stock continued to slide in after-hours trading, quoted around $139.90. This drop came despite the company reporting revenue and earnings that exceeded analyst expectations, highlighting investor concerns over the platform's user growth trajectory and monetization efficiency across different regions.
The market's reaction was primarily driven by the geographic composition of user additions. While global daily active uniques (DAUq) increased by 3.5 million quarter-over-quarter to 130.3 million, the growth was entirely concentrated in international markets. International DAUq surged by 3.8 million to 77.1 million, while U.S. DAUq declined by 300,000 to 53.2 million. This divergence means that international markets accounted for over 100% of the net user growth, a trend that investors view with caution given the substantial gap in average revenue per user (ARPU).
In the second quarter, global ARPU stood at $6.18, but the breakdown reveals a stark contrast: U.S. ARPU was $11.85, while international ARPU was just $2.26. This means each international user contributes only 19 cents for every dollar of U.S. ARPU. Although international ARPU grew by 31% year-over-year, the absolute difference remains a significant drag on overall monetization. International revenue climbed 84%, outpacing U.S. revenue growth of 56%, but the lower base continues to limit overall revenue potential.
An analytical breakdown of the year-over-year revenue increase of $305 million shows that approximately 70.5% of the growth was driven by improved ARPU, amounting to $215 million, while new users contributed only $90 million (29.5%). This suggests that Reddit's revenue growth is becoming increasingly reliant on extracting more value from its existing user base rather than expanding its audience, a strategy that may face diminishing returns if user growth stalls.
Management attributed the soft U.S. results to volatility in search-driven traffic. CEO Steve Huffman noted that referrals were "choppy" and traffic became "more volatile later in the quarter," while COO Jen Wong pointed to algorithm modifications that "more than offset" acquisition efforts. These factors, likely related to changes at Alphabet's Google (GOOGL), have raised concerns about the sustainability of Reddit's user acquisition channels.
Despite the user growth concerns, Reddit's commercial performance remained robust. Advertising revenue surged 64% to $762 million, representing 94.7% of total revenue. The advertiser base expanded by 70%, with significant contributions from smaller and international clients. Profitability also improved markedly: net income more than doubled to $252.8 million, with net margin expanding by 13.5 percentage points to 31.4%. Adjusted EBITDA rose to $343 million, and free cash flow climbed to $261 million, up 135% year-over-year.
Looking ahead, Reddit's guidance for the third quarter exceeded market expectations. The company projects revenue of approximately $865 million, which is 4.3% above the analyst consensus of $829.1 million. Adjusted EBITDA is expected to reach $390 million, 5.7% ahead of consensus, implying an adjusted EBITDA margin of about 45.1%. This optimistic outlook suggests that management sees continued strength in advertising demand, even as user growth challenges persist.
Analysts have taken mixed views on the results. Evercore (EVR) analyst Mark Mahaney described the profit-and-loss figures as "very strong" but noted that U.S. daily user numbers "came in light." The stock's decline also pushed it 10.7% below Reddit's average share buyback price for the second quarter, which may signal a potential buying opportunity for the company's buyback program.
Investors will be watching upcoming results from social media peers Snap (SNAP) and Pinterest (PINS) to gauge whether Reddit's user growth issues are company-specific or indicative of broader industry trends. Snap is scheduled to report on Monday, August 3, while Pinterest will follow on Tuesday. These reports will provide crucial context on advertising demand and user engagement across the sector.
Key risks for Reddit include potential continued adjustments to Google's search algorithms that could reduce referral traffic, increased competition from Meta Platforms (META) in community-based products, and the possibility that weaker growth in overseas markets may limit the impact of new user additions. The company's ability to close the ARPU gap between domestic and international users will be critical to its long-term valuation.
