Reddit Inc. (NYSE: RDDT) experienced a sharp decline in premarket trading on Friday, with shares falling approximately 10% to $161, following the release of its second-quarter earnings report. The drop came even as the company delivered results that surpassed Wall Street expectations, underscoring investor concerns about the quality and monetization of its user growth.
The social media platform reported a 61% surge in quarterly revenue to $804.9 million, comfortably ahead of the $730.4 million consensus estimate. Advertising revenue jumped 64% to $762 million, while net income soared to $253 million from $89 million in the year-ago period. Adjusted EBITDA more than doubled to $343 million, with margins expanding to 42.6% from 33.4%.
Despite these robust figures, the market's reaction was dominated by a troubling trend: international markets contributed 85% of the company's net new daily active users (DAUq) during the quarter, yet accounted for only 25% of incremental revenue. Of the 19.9 million net new daily users, approximately 17 million came from outside the United States, but these markets generated just $76 million of the $305.3 million revenue increase.
The disparity in monetization is stark. International users now represent 59.2% of total DAUq, but they contribute only 20.7% of revenue. The average revenue per user (ARPU) in the U.S. stood at $11.85, which is 5.2 times higher than the international ARPU of $2.26. This gap persists even as overseas growth accelerates, with international DAUq up 28% year-over-year compared to just 6% growth in the U.S.
Digging deeper into the quarterly trends, U.S. DAUq actually declined sequentially to 53.2 million from 53.5 million, while international DAUq grew 5.2% to 77.1 million. However, U.S. ARPU rose 23.1% from the prior quarter, and U.S. revenue climbed 21.4%, indicating that higher pricing offset the shrinking domestic audience. This suggests that Reddit's strategy of increasing ad load and improving targeting is working, but it also highlights the challenge of replicating that success in lower-value international markets.
Management acknowledged some headwinds. Chief Executive Steve Huffman noted that search referrals were "choppy in the quarter," with traffic showing increased volatility toward the end of the period. Chief Operating Officer Jen Wong added that "SEO headwinds" exceeded their acquisition efforts, although the advertiser base expanded by 70%, driven primarily by smaller and international clients.
On the positive side, Reddit demonstrated strong cash generation, with free cash flow of $261 million and minimal capital expenditures of just $1 million, reflecting its capital-light business model. The company also repurchased 1.5 million shares at an average price of $157.57, a level close to Friday's premarket quote.
Looking ahead, Reddit guided third-quarter revenue to $865 million (midpoint) and adjusted EBITDA to $390 million, both exceeding analyst forecasts. The company's outlook suggests continued momentum, but the market's reaction indicates that investors are increasingly focused on the long-term value of international users. With U.S. user growth stagnating, the pressure is on Reddit to accelerate monetization overseas or find new ways to drive domestic engagement.
The stock's decline also reflects broader concerns about the social media sector, as competitors like Meta Platforms (NASDAQ: META) pursue similar community-based strategies and advertising demand remains cyclical. Friday's session will test whether investors can look past the international revenue gap and focus on the company's overall profitability and growth trajectory.
