Reddit (RDDT)

Online community and discussion platform Reddit (NYSE:RDDT) announced better-than-expected revenue in Q1 CY2025, with sales up 61.5% year on year to $392.4 million. On top of that, next quarter’s revenue guidance ($420 million at the midpoint) was surprisingly good and 6.6% above what analysts were expecting. Its GAAP profit of $0.13 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded in 2005 by two University of Virginia roommates, Reddit (NYSE:RDDT) facilitates user-generated content across niche communities (called subreddits) that discuss anything from stocks to dating and memes.

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Competitors in the digital community and social news industry include Meta (NASDAQ:META), Snap (NASDAQ:SNAP), and X (privately-owned, formerly Twitter).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Reddit’s sales grew at an incredible 38% compounded annual growth rate over the last three years. Its growth surpassed the average consumer internet company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Reddit reported magnificent year-on-year revenue growth of 61.5%, and its $392.4 million of revenue beat Wall Street’s estimates by 6.2%. Company management is currently guiding for a 49.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 29.6% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is noteworthy and suggests the market is baking in success for its products and services.

User Growth

As a social network, Reddit generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.

Over the last two years, Reddit’s domestic daily active visitors, a key performance metric for the company, increased by 33.5% annually to 50.1 million in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.

In Q1, Reddit added 8.6 million domestic daily active visitors, leading to 20.7% year-on-year growth. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t accelerating user growth just yet.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Reddit’s audience and its ad-targeting capabilities.

Reddit’s ARPU fell over the last two years, averaging 3.5% annual declines. This isn’t great, but the increase in domestic daily active visitors is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Reddit tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.

This quarter, Reddit’s ARPU clocked in at $6.27. It grew by 7.1% year on year, slower than its user growth.

A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.

For social network businesses like Reddit, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer service, data center, and other infrastructure expenses.

Reddit’s gross margin is one of the best in the consumer internet sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 89.5% gross margin over the last two years. Said differently, roughly $89.51 was left to spend on selling, marketing, and R&D for every $100 in revenue.

In Q1, Reddit produced a 90.5% gross profit margin, marking a 1.9 percentage point increase from 88.6% in the same quarter last year. Reddit’s full-year margin has also been trending up over the past 12 months, increasing by 3.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Reddit has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 16.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Reddit’s EBITDA margin rose by 25.5 percentage points over the last few years, as its sales growth gave it immense operating leverage.

In Q1, Reddit generated an EBITDA profit margin of 29.4%, up 25.3 percentage points year on year. The increase was solid, and because its EBITDA margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Reddit’s full-year EPS flipped from negative to positive over the last three years. This is a good sign and shows it’s at an inflection point.

In Q1, Reddit reported EPS at $0.13, up from negative $7.81 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Reddit’s full-year EPS of $0.58 to grow 124%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Reddit has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 10.9% over the last two years, better than the broader consumer internet sector.

Taking a step back, we can see that Reddit’s margin expanded by 38.9 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Reddit’s free cash flow clocked in at $126.6 million in Q1, equivalent to a 32.3% margin. This result was good as its margin was 20.2 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Companies with more cash than debt have lower bankruptcy risk.

Reddit is a profitable, well-capitalized company with $1.95 billion of cash and $26.55 million of debt on its balance sheet. This $1.92 billion net cash position is 9.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Reddit’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its number of domestic daily active visitors was in line. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 18% to $140.01 immediately following the results.

Updated: July 10, 2025 at 11:37 PM EDT

Before making an investment decision, investors should account for Reddit’s business fundamentals and valuation in addition to what happened in the latest quarter.

Reddit is a cream-of-the-crop consumer internet company. First of all, the company’s revenue growth was exceptional over the last three years. And while its ARPU has declined over the last two years, its admirable gross margins are a wonderful starting point for the overall profitability of the business. Additionally, Reddit’s rising cash profitability gives it more optionality.

Reddit’s EV/EBITDA ratio based on the next 12 months is 46.1x. A lot of good news is certainly baked in given its premium multiple, but we’ll happily own what we believe is one of the best businesses in our coverage. We’re in the camp that investments like this should be held for at least three to five years to negate the short-term price volatility that can come with high valuations.

Wall Street analysts have a consensus one-year price target of $149.12 on the company (compared to the current share price of $143).