Reddit expects revenue above estimates as AI tools attract advertisers

Reddit anticipates its third-quarter revenue will surpass Wall Street's expectations, a positive sign attributed to its strategy of attracting advertisers with AI-driven tools. The social media platform's shares experienced a 6% decline in volatile extended trading on Thursday, however, following the release of its second-quarter results which indicated a slowdown in both revenue growth and its U.S. daily active unique visitor count.

The company's suite of advertising tools is designed to boost campaign effectiveness. These features include a library of successful advertisements, the generation of Reddit-specific ad copy, tracking of user actions post-ad exposure, and the ability to target users based on interests and community discussions within subreddits. Reddit operates in a competitive landscape, with rivals like Meta actively pursuing Reddit's core community model through platforms such as Threads and a new Forum app for Facebook Groups.

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The company's advertiser growth in the second quarter was 70 percent year-over-year. So, we continue to onboard a lot more new advertisers onto Reddit.

Despite the share price dip, Reddit's Chief Operating Officer Jen Wong highlighted strong advertiser growth. "The company's advertiser growth in the second quarter was 70 percent year-over-year. So, we continue to onboard a lot more new advertisers onto Reddit," Wong told Reuters. She noted this growth was particularly robust among mid-market, small- and medium-sized businesses, and international advertisers. For the third quarter, Reddit projects revenue between $860 million and $870 million, exceeding the analyst average estimate of $829.1 million. Second-quarter revenue reached $805 million, a 61% increase year-over-year, surpassing estimates of $730.4 million.

However, the sequential growth of U.S. daily active unique visitors slowed in the second quarter. Globally, daily active unique visitors rose 18% year-over-year to 130.3 million, showing a slight increase from the prior quarter's growth. Co-founder and CEO Steve Huffman acknowledged "choppy" search referrals and increased traffic volatility later in the quarter, but maintained that the "commercial business is strong." Wong attributed "SEO headwinds" from search algorithm changes for "more than offset[ting]" user acquisition efforts during the quarter, though product enhancements are reportedly converting lower-engagement search engine visitors into loyal app users. Reddit also forecasts quarterly adjusted earnings before interest, taxes, depreciation, and amortization between $385 million and $395 million, also above estimates.

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The commercial business is strong.