Reddit reported record profits and surprised the market with a forecast. The stock soared

Shares of forum owner Reddit jumped nearly 18% in over-the-counter trading after reporting record profits and a strong outlook for the third quarter, confirming the success of the company's advertising arm. The results were positively impacted by a rapid increase in advertising revenue, aggressive user base expansion and a bet on AI services. The company's securities remain slightly down since the beginning of the year, but analysts advise to buy them;

Financially, the second quarter was the most profitable in the company's history, reports Business Insider. Revenue increased 78% year-over-year to $500 million, the fastest growth rate since 2022. 

The bulk of revenue came from advertising, which brought the company $465 mln, 84% more than a year earlier. The number of advertisers grew by 50% year-on-year, the highest in three years. Revenue in nine of 15 key advertising segments jumped 75% or more. Technology, finance, retail, pharmaceutical and medical advertising were particularly strong performers, writes MarketWatch. 

Reddit, to go public in March 2024, is investing heavily in ad tech in a bid to increase its share of a digital advertising market still controlled by giants such as Meta Platforms and Google, scores Bloomberg. Although Reddit was founded nearly two decades ago, its IPO at a $6.4 billion valuation has breathed new life into the platform, accounts Business Insider.

Right now, Reddit's advertising revenue is mostly generated by a small number of large clients, but the company is deliberately working to attract small and medium-sized businesses to reduce risk, accounts Bloomberg. In addition, Reddit is actively building international partnerships to expand and diversify its advertising base, Chief Operating Officer Jennifer Wong told the agency. 

"We are seeing an increase in the number of active advertisers on the platform," Wong noted. - Investments in the sales team, advertising technology and product development are paying off - everything we've been working on is starting to bear fruit.

Reddit reported net income of $89 million, or 45 cents per share, compared with a $10 million loss a year earlier, which was due to IPO-related costs. Reddit's daily active users increased 21% year over year to 110.4 million, exceeding analysts' forecasts of 109.02 million. The platform posted higher-than-expected growth for the second consecutive quarter.

One of Reddit's priorities is to actively develop a global presence. The international audience grew 32% to 60.1 million in the second quarter, while the number of users in the U.S. increased 11% to 50.3 million, according to a report from the company. 

The company is also actively developing artificial intelligence (AI)-based features. In 2024, Reddit contracted with Google, allowing the search giant to use its content to train AI models. In exchange, Reddit gained access to Vertex AI, Google's machine learning platform, so it could implement advanced search features and other technologies, reminds Business Insider. 

According to CEO Steve Huffman, Reddit's new search service has 70 million weekly users. In addition, Reddit Answers, an AI feature that makes it easier for users to find relevant information, grew from 1 million to 6 million weekly users during the quarter. Huffman announced that Reddit will integrate the feature deeper and make search a central part of the user experience on the platform.

The outlook for the third quarter was also strong, with the company expecting revenue in the range of $535 million to $545 million, compared to the Bloomberg analyst consensus estimate of $473 million. The company's estimated adjusted EBITDA is in the range of $185 million to $195 million. 

At the same time, in order to focus on priority areas, Reddit has decided to cut resources on some initiatives, including the development of the so-called user economy. The prospectus for the 2024 IPO mentioned plans to create a user-centric business line - for example, through gaming services or marketplaces similar to Roblox or Facebook Marketplace, references CNBC. 

The main trading session on July 31 ended with Reddit shares rising 7.5%, and after the report was published, they jumped almost 18% in extended trading. Quotes soared 14% in the premarket on August 1. Since April's minimum securities Reddit have risen in price by about 110%, partially recouping losses from the beginning of the year. A particularly sharp rise came in June after the presentation of new AI tools for advertising at the Cannes Lions festival. However, quotes remain well below their February peak and are still down about 2% since the start of 2025, stated Yahoo Finance. 

Investors and analysts have been keeping a close eye on user activity metrics in the report, stated Investor's Business Daily. One key reason was fears about Reddit's heavy reliance on conversions from Google Search. The stock fell sharply after a fourth-quarter report in which the company acknowledged that changes to Google's algorithms had a negative impact on audience growth. JPMorgan analyst Doug Anmuth estimates that about 40-50% of Reddit's traffic comes from Google, writes Yahoo Finance. 

In a research note ahead of the report's release, Jefferies' John Colantuoni reiterated a buy recommendation on the company's stock and noted that third-party web traffic data shows Reddit user activity has stabilized over the past three months after slowing earlier in the year, stated Investor's Business Daily.

Needham analyst Laura Martin also maintained a "buy" recommendation and said: "The bearish scenario - that Google will stop directing traffic to Reddit - is not materializing. Moreover, AI-based tools indicate that Reddit is already successfully monetizing generative AI."

According to data from MarketWatch, of the 29 analysts tracking the company's securities, 18 of them recommend buying (Buy and Overweight ratings),  ten advise holding (Hold), and only one recommends selling (Sell).

The rise in Reddit's stock was driven in part by strong quarterly results from Meta Platforms, which significantly beat revenue forecasts. Investors took this as a positive signal for the entire sector, including smaller social networks like Reddit, writes Investor's Business Daily.

Advertisers are increasingly turning to platforms like Reddit, Meta and TikTok, which offer advanced AI-powered tools for creating advertising content, reports Reuters. Emarketer analyst Jeremy Goldman added: "Reddit posted the kind of quarter that even the most critical sabreddit branch would be proud of."

Reddit's successful quarter boosted investor confidence in the prospects for digital advertising, stated Investor's Business Daily. Shares of Snap (owner of Snapchat) rose in after-hours trading, adding 1.18% in the main session. Pinterest's stock also showed a slight increase. Both companies will report next week.

This article was AI-translated and verified by a human editor