Reddit Inc. (NYSE: RDDT) saw its shares fall 9.3% in after-hours trading on Thursday, dropping to $161.55 after closing the regular session at $178.04. The decline came even as the social media platform reported second-quarter earnings that surpassed analyst expectations, highlighting a growing divergence between user engagement and revenue generation.
Revenue for the quarter surged 61% year-over-year to $804.9 million, exceeding consensus estimates by $74.5 million, or 10.2%. Advertising sales, which account for nearly 95% of total revenue, jumped 64% to $762 million, driven by increases in both ad prices and impressions. Net earnings more than doubled to $252.8 million, or $1.25 per diluted share, compared to $89.3 million, or $0.45 per share, in the same period last year.
However, the company's U.S. daily active uniques (DAUq) declined by 300,000 sequentially to 53.2 million, marking a 0.6% drop from the first quarter. Global DAUq increased 2.8% to 130.3 million, driven entirely by international growth of 5.2% to 77.1 million. This flatness in domestic user numbers weighed on investor sentiment, as the market had expected stronger engagement in Reddit's home market.
Average revenue per user (ARPU) painted a more positive picture, jumping 36% globally to $6.18, with U.S. ARPU rising 51% to $11.85 and international ARPU up 31% to $2.26. An initial analysis by the company suggests that increased monetization accounted for approximately 65% of the revenue growth in the quarter, while audience expansion contributed the remaining 35%. This heavy reliance on monetization exposes Reddit to fluctuations in ad pricing and campaign demand.
Looking ahead, Reddit provided third-quarter guidance that points to revenue of $860 million to $870 million, with a midpoint of $865 million, representing year-over-year growth of about 47.9%. This would mark the end of the company's streak of eight consecutive quarters with growth exceeding 60%. Adjusted EBITDA is expected to be between $385 million and $395 million, with a midpoint margin of 45.1%, up 2.5 percentage points from the second quarter's 42.6%.
Chief Operating Officer Jen Wong noted a 70% year-over-year increase in the number of advertisers, stating, “We continue to onboard a lot more new advertisers onto Reddit.” Meanwhile, CEO Steve Huffman acknowledged that search referrals have become “choppy” and traffic more unpredictable, though he emphasized that the commercial side of the business remains strong.
The company faces external pressures from Alphabet Inc. (NASDAQ: GOOGL), which can shift referral patterns through changes to its search algorithms, and Meta Platforms Inc. (NASDAQ: META), which is introducing new community-focused offerings. These competitive dynamics, combined with softer U.S. traffic and ad-cycle fluctuations, represent key risks for Reddit moving forward.
Investor focus now centers on whether Reddit can sustain its premium monetization trajectory as user growth levels off. The third-quarter guidance suggests that margin expansion may help offset the slowdown in revenue growth, but the after-market selloff indicates that the market remains skeptical about the company's ability to balance engagement and profitability.
