Reddit just shocked the stock market with record profits—here’s how they did it

In a significant leap for Reddit, Inc., the social media platform reported its first-ever quarterly profit in Q3 2024, driving a surge in its stock price by 22%. With a record-breaking revenue of $348.4 million, surpassing the expected $312.8 million, and a notable earnings per share (EPS) of $0.16 against forecasts of a $0.07 loss, Reddit’s financial performance has captivated investors. Analysts are highlighting the company’s success in user engagement and revenue growth as a strong indicator of its future potential in the competitive social media space.

User growth boosts revenue, pushing Reddit’s profitability

Reddit has seen exceptional growth in user engagement, reaching an impressive 97.2 million daily active users in the third quarter—a 47% rise year-over-year. This surge in active users has enabled Reddit to increase its average revenue per user (ARPU) to $3.58, well above the expected $3.24. CEO Steve Huffman commented indirectly on the platform’s record growth, attributing the achievement to community-driven engagement and continuous innovation. Industry observers consider this growth in ARPU as Reddit’s success in transforming high user engagement into profitable revenue streams.

Notably, Reddit’s profitability has come amid a focused expansion of its advertising model. Recent initiatives in ad personalization, along with AI-driven recommendations, have effectively tapped into Reddit’s vast community base. This quarter marks a milestone as Reddit’s gross margin improved to 90.1%, an increase from last year’s figures, as it continues to make strides in monetizing its user activity.

Cash flow and future guidance signal robust outlook

Alongside its earnings surprise, Reddit delivered a robust financial performance in cash flow management. Operating cash flow for the quarter stood at $71.6 million, a sharp improvement from previous periods. Free cash flow reached $70.3 million, positioning Reddit with strong financial resilience for upcoming quarters. Investors were also pleased by Reddit’s guidance for Q4, with anticipated revenues between $385 million and $400 million—comfortably exceeding analyst expectations and setting the stage for continued growth.

Expert perspective: the impact of AI and advertising

Experts are pointing to Reddit’s AI-driven advertising strategies as a game-changer in its monetization success. Industry analyst Mark Hill remarked that Reddit’s AI-driven ad targeting has greatly boosted engagement with advertisers, allowing the platform to offer more relevant and personalized ad content. This strategy has resonated well in a market where advertisers increasingly seek highly engaged, niche audiences. Hill suggested that Reddit’s approach may provide it a competitive edge, particularly as it continues expanding its ad offerings.

Reddit has also made strides in increasing its logged-out user base, growing it by 70% this year, which provides another future monetization opportunity as these users convert into active, logged-in members. Huffman shared that Reddit’s priority is to facilitate seamless sign-ups for these users, adding that the platform’s “resilience” in direct traffic growth makes it less vulnerable to changes in search engine algorithms.

Market impact and Reddit’s stock trajectory

Following these strong earnings, Reddit’s stock, which went public in March 2024, has now nearly tripled in value. Analysts suggest that Reddit’s financial health and user growth are positioning it as a strong competitor among social media firms. This impressive growth trajectory not only boosts Reddit’s valuation but also highlights its role in the social media landscape as a unique platform for community-driven, engaged advertising.

Reddit’s recent developments underscore its focus on leveraging user engagement through technology and advertising innovation, setting a bullish tone among investors and positioning Reddit for further gains in both market share and profitability.