Reddit (NYSE: RDDT) shares slipped 3.3% to $154.71 in midday trading Wednesday, falling below the company's average buyback price for the second quarter. The decline reflects growing investor anxiety over potential disruptions from Google search changes, even as the social media platform delivered robust advertising revenue growth.
At 12:54 p.m. EDT, the stock traded 1.8% below Reddit's average repurchase price of $157.57 per share. The company spent $235 million during the quarter to buy back 1.5 million shares, leaving $760.4 million authorized for future repurchases, representing 2.4% of its market capitalization as of Wednesday.
The market's reaction comes despite a strong earnings report. Reddit's second-quarter revenue reached $804.9 million, up 61% year-over-year and 10.2% above LSEG consensus estimates. Advertising revenue climbed 64% to $762 million, accounting for 94.7% of total revenue. Adjusted EBITDA surged 106% to $343 million, while free cash flow more than doubled to $261 million.
Management's third-quarter guidance also exceeded expectations, with a revenue midpoint of $865 million (4.3% above consensus) and EBITDA guidance of $390 million (5.7% above estimates).
However, the core issue lies in user growth dynamics. The United States contributed 79% of total revenue but only 41% of daily active users, while international markets represented 59% of users but just 21% of revenue. U.S. ARPU increased 51% year-over-year, but daily user growth in the U.S. slowed to just 6%. In contrast, international daily users grew 28%, yet ARPU there rose only 31%.
This disparity highlights Reddit's heavy reliance on its domestic market for monetization. While U.S. ARPU growth outpaced user growth by a factor of 8.5, the sustainability of this leverage depends on stable ad pricing. If search referrals continue to decline, the imbalance could become a liability.
CEO Steve Huffman acknowledged that AI Overviews did not deliver "a similar level of positive impact," while COO Jen Wong cited "SEO headwinds" that offset user-acquisition efforts during the quarter. Advertising revenue, which rose 64%, was driven by a 40% increase in ad prices and 17% growth in impressions.
Investors are also weighing the potential of Reddit's data licensing business. Google reportedly pays $60 million annually for data access, and Wells Fargo analyst Alec Brondolo estimates that new deals with Google and OpenAI could generate up to $550 million combined, representing 17% of Reddit's annualized Q2 revenue run rate. However, these projections remain speculative.
Analyst price targets reflect the divided sentiment. Neutral-rated firms like Wells Fargo ($142) and Roth Capital ($145) emphasize traffic risks, while outperform-rated analysts such as Oppenheimer ($200) and Wedbush ($221) highlight ad execution and licensing upside. The range spans from $142 to $221, implying returns of -8.2% to +42.8% from Wednesday's price.
Key risks remain centered on search referrals, potential ad price plateauing, and deal terms. Reddit's buyback authorization does not obligate purchases, and the $157.57 level serves more as a reference point than a definitive support. For investors, the question is whether Reddit can maintain its domestic monetization strength while addressing international growth challenges.
