Reddit Stock Breakdown
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Stock Breakdown
Social media is a beautiful business model.
Users create the content.
The content and current users convince others to sign-up.
The only produce they sell is advertising…
Which has no COGS or messy inventory to manage.
And can grow indefinitely with usage.
This is social media at it’s best.
Meta’s Facebook and Instagram is the poster child of how beautiful this business can work with >$200 billion in annual revenues, 50% core margins, and still growing >20%.
However, for most social media players their reality is very different.
While some struggle to keep users engage…
The real pain point is monetizing the site.
Because it turns out that most social media doesn’t led itself so easily to advertising as you’d assume.
While Meta, Google’s YouTube, and Tiktok are the best-in-class…
There is a long list of sub-scale social media companies that have failed to live up to their monetization hype—Snapchat, Pinterest, Twitter/X, and Reddit…
In the last quarter alone, Meta’s increase in revenue was bigger than any of those businesses total revenue.
And these are not new businesses either.
Snapchat was started in 2011, Pinterest 2009, Twitter 2006, and Reddit 2005.
Investors have been tripping over themselves looking for the “next Meta” in this landscape for years…
Which has yet to bear fruit.
But could Reddit be the first to break the mold?
After years of being a 2nd rate advertisement platform they have made strides in brand safety, contextual targeting, new ad units, and employing AI to improve targeting and conversion with “Reddit Max”.
They also are a critical part of the open web with over 470 weekly unique users visiting the site for everything from humor to figuring out how to install luxury vinyl flooring.
And daily active users have been growing too, up 19% y/y.
Unlike other social media sites, Reddit is more community focused with users following, engaging, and sometimes moderating subreddits on a particular topic that is a passion of theirs.
This engagement is unique and gives brands a new way to interact with users in a more authentic way than glossy Instagram ads.
With revenues growing 70% y/y and brands desiring to diversify away from the Meta and Google walled-gardens, could Reddit be a new top tier venue for advertisers?
We cover all of this and also their international opportunity, their role as a data provider for AI, and much more in this week’s Five Minute Money.
Business.
Reddit has $2.2 billion in revenue for 2025, with total revenues up 70% y/y.
They operate through 2 segments: 1) Advertising and 2) Other Revenue.
Advertising is $2.05 billion, up 74% y/y.
Other Revenue is $140 million, up 22% y/y. This primarily includes deals with OpenAI and Google for them to license Reddit data to train on.
There is also a small portion of revenue from Reddit Premium, which is an ad-free version for $5.99 a month and purchases of “gold” for as little as $1.99 which can be spend on badges that are awarded to user’s answers they like.
Reddit has a total of 470 million weekly active users (WAUs) and 121 million daily active users (DAUs).
Their business model is simple.
They generate revenues by showing users ads.
Their revenue model relies on 4 variables: numbers of users, time spent per user, number of ads shown per user (ad load), and the price they can charge for their ads.
The first 3 are relatively self explanatory—if they can get more users to spend more time on their platform, then they will be able to show them more ads.
However, the last factor—ad price—is a bit more complex, so we will have a whole section on it next.
Unlike other social media platforms, a majority of the users are “logged out” when they use Reddit.
Part of that is because a lot of users go to Google to ask a question and then end up on a Reddit page.
This is good for Reddit because it is free traffic that is directed to their site, but it also means that once the user finds the information they are looking for, they leave.
Reddit is well aware of this issue and instead of gating the platform more (as Instagram or Twitter does by requiring a log in to see content) they are personalizing the logged-off user’s experience more.
The hope is that this increases user session length and increases the chances they return in the future.
It is worth pointing out though that logged out users limit their ability to gather data and target ads.
To the positive though, users do show their interest because the site is organized by topics (subreddits) which signal a users interest and allow for contextual advertising (i.e. looking up the best way to clean your classic car and ads for car wax pop up).
ARPU (average revenue per user) was $6 in 4Q globally.
This compares to Snapchat at $3.60 and Meta at $16.60.
The platform tilts heavily to United States with 40% of all users and 81% of all revenues coming from the US.
Despite 60% of users being international, 90% of all posts are in English. (They are starting to lean on AI to translate posts to boost cross-language use)
In the United States ARPU for Reddit is closer to $35 a year versus Meta at over $250 and Snapchat and Pinterest at $40 and $32, respectively.
We can see that Reddit is already in the vicinity of monetizing as well as the 2nd tier ad platforms as they implemented a slew of improvements in the past few years.
However, they still have very far to go to reach Meta, which we will explore in the next section.
In terms of profitability though, their gross margins are 70% and operating margins are 20%, which better than Snapchat (55% gross, negative op. margin) or Pinterest (80% gross margin, 8% operating margin).
It is worth emphasizing that Reddit has better profitability metrics despite having less revenue at $2.2bn vs Snapchat’s $6bn and Pinterest’s $4.2bn.
Improving Ad ARPUs
Key to Reddit being successful is their ability to improve their advertising targeting and measurement.
This is what will unlock a whole new world of advertiser budget.
First though, we need a bit more understanding of the ad industry.
We can group ads into too general buckets: 1) brand and 2) direct response.
Brand ends are also known as “top of funnel”.
These are ads like Nike’s “Just Do It”, where the whole advertisement is just about brand awareness (and not about getting the consumer to buy a specific product).
They are called top of funnel because they are just about introducing a brand to a customer or staying top of mind.
This sort of advertising is considered lower quality though because it is not tied directly to a purchase and its efficacy is very hard to measure.
Right now Reddit has a lot of brand advertisers. It is hard to say exactly how many but their top 10 biggest advertisers are 21% of revenues in 2025, which is very high ad concentration.
This is down a bit from 25% the year prior, but ideally your top 10 advertisers can drop out with little to no impact to your business at all.
This is only possible though once you build up a big advertiser base and can “solve” direct response.
Direct response is the other type of advertising and it is great because it creates a sale for the advertisers.
What better way to prove your advertising is effective than to be able to show a user clicked on the ads and purchased the product?
This sort of advertising is so effective it drove Meta to >$50bn in revenues a quarter. They are the absolute best in class at this.
It is hard to do for a few reasons though.
First of all , you need to be the type of platform that a user is likely to buy something on. Instagram and Facebook are great because when users are on there they are usually just killing time and if they see a dress or supplement they want, they’ll buy it.
In contrast, Snapchat struggles to monetize as well because it is primarily used for messaging. People don’t open Snapchat to kill time they way they do on Tiktok or Reels, they instead open it to reply to a message or send a photo and close the app.
This forced Snapchat to try to create new ad surfaces (like Spotlights and stories) that ads can be shown against. It has somewhat worked.
Reddit is a platform users often come to with some intend (that is because so many users come from Google search). This intend can be a good thing as the right ad can trigger a purchase, but more often than not the users are still in research mode.
This means if a user is shown an ad (even if it is a good one) they aren’t ready to purchase yet.
A lot of Reddit too is primarily text driven, so ads stand out a lot more versus Instagram where they are often hard to tell apart from the content. (Reddit does have text ads too).
The big problem though is the catch 22 in building out a direct response business.
In order to properly tailor the ads to an individual user, the ad platform needs to have a lot of ads to pick from. In order to get a lot of ads to pick from, the platform needs to prove that it can show a good return on ad spend. In order to show a good return on ad spend, it needs to have ads that can be targeted to the right users—which is hard to do without a large repository of ads to pick from.
This is where a lot of the other social media ad platforms struggle—they need to build advertiser inventory and advertisers are reluctant to give them much ad budget before they can prove themselves.
A lot of these platforms start with “exploratory budgets” where the advertiser experiments with ad budget. The advertiser ideally wants to diversify, but not at the cost of performance.
Performance here is ROAS or Return on Ad Spend.
They measure for every dollar they spend on advertising how much money they make back. The higher the ROAS, the more they will spend on ads.
To do this well, Reddit needs to both target the right ad to the right user and also have the ability to measure when an ad works.
Without both targeting and measurement, a direct response platform will never really take off.
Right now Reddit it trying to improve this capability and have rolled out something called Reddit Max which utilizes AI to better target ads.
Some advertisers are seeing good ROAS today and are increasing their budgets on Reddit a lot.
However, that is based off of a small set of data and cheap ad prices.
When ad prices are cheap (on a cost per thousand basis or CPM) it is easy to show performance because the advertiser is paying so little for the ads.
As the ad CPM increases, the targeting needs to improve along side it so that an ad can be shown to fewer people and still get a sale.
This is hard to do.
With only $2.2 billion in revenues and ~470mn weekly users, it is likely that Reddit was under-monetized, but the real question is whether they will be able to achieve anywhere near the level of success Meta has—not if they will be the best of the 2nd tier social media platforms.
Before I conclude my thoughts on the likelihood of this, it is worth touching on a few other growth drivers.
Other Growth Drivers.
Beyond improving their ad targeting and measurement, they have a few other opportunities.
1) International growth. Right now only 60% of their users are international and there is room for this to grow.
2) Improving the logged out user experience with better curated content could improve time spent (and convert them to logged in users down the line)
3) New data partnerships with other AI model companies or businesses that want to user their data for sentiment products (Nasdaq partner company ICE uses Reddit data for a product that gauges investor sentiment)
4) Time Spent growth with their existing users as AI can make recommended content better.
5) Improved Reddit Search, which could push more activity onto the app that was typically done through Google Search
6) Increase monetizable surfaces like with answers and search.
Can Reddit gain even half of Meta’s Ad Success?
It will be very hard for them to and the odds are certainly against them.
Instagram and Meta benefited from many unique aspects of their platform: 1) having a social graph, which turned out to be very important for advertising, 2) collecting a ton of behavior information from logged-in users, often with real names and other personal data, and 3) tens of millions of businesses already having accounts on the platform.
In addition to that, Meta had to convince all of these advertisers to install something called a pixel on their website which sent info back to Meta.
And then when Apple’s App Tracking Transparency prevented the pixel from firing, they had to convince millions of advertisers to install “CAPI” of conversion API server side to get around ATT.
This is not a trivially easy thing to install, and advertisers aren’t going to want to go through the hassle of doing it unless they are sure it will be worth it.
Reddit not only has to do all of the hard work of scaling the ad platform, but they have some unique disadvantages.
1) Over half of users are logged out
2) Users our anonymous
3) Text-centric platform
4) Unclear how receptive users are to in the moment purchases (I would guess much less than Instagram, but more than Snapchat—some investors will disagree with me on this).
5) Much more limited behavior information on users
6) Creative ad friction where ads need to be reworked to work well on Reddit.
a. There is a bit of an anti-ad culture on Reddit because the Reddit platform itself is counter culture. In fact, if users think any post is shilling a product they will down vote it.
This is in addition to the lower ad inventory and generally worse targeting ability they have. Both of which are solvable, but it will not be easy to replicate Meta’s success.
Reddit does has some unique benefits too though if an advertiser can use Reddit properly because a lot of users trust Reddit recommendations more than any single source.
In fact, many Google searches simply point to Reddit for recommendations.
And LLMs are pulling a lot of data from Reddit so that means businesses and advertisers having a presence on the platform is likely to only be more important in the future.
Reddit still has opportunities to improve and have been doing several things to increase advertisers ROAS.
1) Reddit Max Campaigns. This is the biggest one. It is a fully automated AI-driven ad placement that places the ads in the best subeddits on the platform without the advertiser having to pick. It also helps create “Reddit-Native” headlines and suggested thumbnails.
• As noted in their last earnings call “Max Campaigns delivered 17% CPA reduction and 27% conversion volume lift.”
2) Trying to push for more logged in users and cut off API access
3) Reddit Pixel and CAPI to improve measurement when an ad works
4) Growing advertiser count 75% y/y, including adding middle market and SMB users.
5) New ad units including Dynamic Product Ads.
These efforts have already shown signs of working and are a key reason why advertisers have shifted ad budgets to Reddit.
Below is a former Reddit ad team lead on why Reddit is a unique ad venue and what is improving the platform (expert call courtesy of AlphaSense).
So to be clear, I think they have a lot of room to improve and continue to attract more advertisers.
But I am cautious to say that they will have anywhere near the same degree of success Meta had with direct response advertisers, which is what will prevent them from being a truly massive ad platform.
However, maybe they don’t need to be anywhere near as successful as Meta for a Reddit investment to work.
It ultimately goes to what’s priced in today and how much revenue growth you need for an investment to work.
Valuation.
At $150 a share, Reddit has an enterprise value of $27 billion.
With about $350mn in NOPAT, they trade about 80x trailing earnings.
An investor will need about 3 years of 50% operating growth to get to a market multiple.
At a 30% margin, this would imply roughly $4.9 billion in revenues or about a 3 year revenue growth rate of 30%.
While this seems plausible, this is roughly what is already priced in.
In order to get a return you will need high growth thereafter too.
If they can get to Snapchat’s revenues of $6 billion with a better margin structure of 40%, that is about $1.9bn in earnings.
If they are still growing 20%+ thereafter, a 25-30x multiple could be fair, which is about a $50 to 60bn valuation (after adding back a few billion in accumulated cash).
This is an upside of 80% to 120%.
If it takes them 5 years to do that, that is a 12% to 17% annualized return.
If they really crack the direct response ad unit, their growth could be much higher than that, warranting an even higher multiple.
However, it is also possible that their growth starts to tamper out.
Snapchat grew just 10% last year. Pinterest grew just 15% on a lower revenue base ($4.2bn).
I said earlier that $4.9bn in revenue is roughly what is priced in today. Let’s round to $5 billion. If they reach that and then are only growing low double digits a 20-25x multiple is fair.
Giving them credit for a 40% operating margin on $5 billion in revenues would be $1.6 billion in earnings. At a 20-25x multiple that is roughly a $35bn to $43bn valuation (added back a few billion in cash they accumulated).
If that takes 4 years, that is an annualized return of 7% to 12%.
The real bear scenario though is simply that advertising growth slows sooner than that and it was a mistake to extrapolate out their 70%+ growth.
While it isn’t a perfect comparison, in 2021 Snapchat grew 65% and Pinterest grew 52%. The following years they each grew 11% and 9%, respectively.
This is the danger of extrapolating out high growth rates.
Until Reddit can make direct response ads work, their growth is more at the whims of brand advertisers and they are stuck in smaller “exploratory budgets”.
Getting beyond this has been something Snapchat, Pinterest, and Twitter/X have tried to do for years, all with limited success.
One positive for Reddit though is that their margin structure is already better than those businesses, and on a lower revenue base too. (SBC is also high at around 15% of revenues, but their GAAP margins take that into account)
So even if growth slows, they will at least have GAAP profits to somewhat protect their valuation to the downside.
Whether they can continue to make ad improvements and prove a ROAS is the real key question because right now advertisers still have Meta and Google as an option, and AI has only made all of their targeting better.
Meta is actually guiding to a revenue growth reacceleration.
This isn’t a winner takes all market and advertisers do want to diversify out their ad budgets, but Reddit still has far to go to prove that they deserve that ad budget.
It will be an investor's decision whether they want to take a bet on that.
For more on Reddit, check out this video below.
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