Key Takeaways:
Reddit’s advertising revenue accelerated dramatically, surging +84% year-over-year in Q2'25, marking its fastest growth rate since 2022 and signaling strong momentum in its core business.
The high-margin AI and data licensing business is a significant value driver, with major deals secured and an estimated 85% operating margin, leveraging a data corpus that has no high-quality substitutes at scale.
Despite strong top-line performance, user growth remains a key risk, with persistent volatility in US logged-in users and a heavy dependence on Google search traffic, which is undergoing its own AI-driven disruption.
Reddit's exceptional Q2'25 results have forced a re-evaluation of its investment thesis. With revenue and profitability blowing past expectations, the narrative is shifting from a volatile, community-driven platform to a potentially powerful, dual-engine growth story fueled by advertising and data monetization. For investors, the critical question is whether this stellar performance represents a sustainable inflection point or a temporary surge that masks underlying risks in user acquisition and market competition. I believe the recent execution demonstrates a fundamental strengthening of the business model, but the path forward requires a clear-eyed view of the challenges.
The Bull Case
My analysis indicates that the primary drivers of Reddit's recent success are potent and have room to run. First and foremost is the acceleration in advertising revenue. A +78% YoY increase in total revenue to nearly $500 million in Q2 was led by an +84% surge in ad revenue. This wasn't a fluke; it was broad-based, with nine of the top 15 verticals growing over 75%. The company is executing on its ad-tech roadmap, with new products like Dynamic Product Ads (DPAs) delivering approximately 2x higher ROAS for clients. With the active advertiser count growing by over 50% YoY, Reddit is successfully expanding its market share.
The second pillar of the bull case is the burgeoning AI and data licensing opportunity. This is not a theoretical source of future revenue; it’s happening now. With existing agreements valued at around $200 million each, this high-margin business (estimated 85% operating margin) leverages Reddit's unique corpus of over 2 billion posts and 20 billion comments. This authentic, human-generated data is cited as the #1 domain for AI across all models, creating a significant competitive moat.
Finally, the company is demonstrating impressive operating leverage. Reddit delivered $167 million in Adjusted EBITDA at a 33.4% margin in Q2, alongside $111 million in Free Cash Flow. Management's commitment to growing the topline at twice the rate of expenses, with a long-term Adjusted EBITDA margin target of 50%, suggests a clear path to sustained, high-level profitability. Even with user growth headwinds, global DAUq still grew 21% YoY to 110.4 million, showing that strategic initiatives to improve the user experience are gaining traction.
The Bear Case
Despite the outstanding quarter, significant risks remain that could derail the growth trajectory. The most persistent concern is the volatility of user growth, particularly in the valuable US market where logged-in DAUq saw a modest sequential decline. Reddit’s heavy reliance on Google for traffic acquisition is a double-edged sword. As Google continues to evolve its own AI-driven search products, the disruption to Reddit's user funnel could accelerate, posing a material risk to long-term impression growth.
Competition in the digital advertising space is, to put it mildly, intense. Reddit is fighting for budget against behemoths like Meta and Google, whose scale and sophisticated ad platforms present a constant threat to market share gains. An economic downturn would almost certainly pressure digital ad spending, and Reddit is not immune to such macroeconomic shifts. This competitive pressure also feeds into valuation concerns, as the stock currently trades at a premium to many of its peers.
Lastly, the celebrated data licensing business carries its own set of risks. There is uncertainty around the renewal of key agreements, such as the one with Google in 2026. Furthermore, this novel revenue stream could attract regulatory scrutiny from bodies like the FTC, potentially jeopardizing its future. Internal platform risks, such as moderator dissent or issues around content moderation, while less immediate, remain a background threat to the ecosystem's stability.
Final Take:
My view is that Reddit is successfully executing a difficult transition. The company has proven it can build a formidable advertising business and is now monetizing a unique data asset that the market is valuing at a premium. The operational leverage is undeniable, and the path to its 40-50% long-term Adjusted EBITDA margin target seems increasingly credible.
However, the user growth volatility cannot be ignored. The company's future enterprise value will be heavily dependent on its ability to stabilize and grow its user base, especially in the US, independent of Google's algorithm changes. For now, the strength in monetization and profitability provides a powerful counterbalance to these risks. I see the current dynamic as a race between operational execution and external platform risks. At present, execution is winning.
What are your thoughts?
How do you weigh the high-margin AI data opportunity against the persistent user growth volatility in your own analysis?
Best,
Capdrift
Disclaimer: The information in this newsletter is for educational purposes only and is not financial advice. Please conduct your own research before making any investment decisions.