RDDT: In the sweet spot as monetization accelerates

$Reddit(RDDT.US) delivered a solid Q1. As a key AI data source with highly authentic user-generated content, Reddit is benefiting from traffic referrals from gateways such as Google. At the same time, the platform remains early in monetization and is expanding beyond brand ads into performance advertising.

Shifting from search (users find content) to feed (content finds users) should be the next growth driver, with ad load still below peers. We see a favorable near-term revenue ramp, though margin expansion may slow as product investments step up.

Ahead of earnings, Cleveland’s checks suggested that amid macro volatility advertisers cut brand budgets from late Mar and shifted to higher-ROI top platforms. This reset growth expectations and kept the stock under pressure, easing valuation froth. A print showing no slowdown in growth helps alleviate these concerns.

That said, the report is not without issues: U.S. user growth remains sluggish, and Q2 revenue guidance implies a decel to +45% from Q1’s +69%, which may indirectly corroborate the above industry checks. However, management tends to guide conservatively, and the automated campaign tool Reddit Max is expected to fully roll out in Q2 (beta launched in Jan; thousands of advertisers already onboard), which could drive another beat.

Starting in Q3, Reddit will no longer separately disclose logged-in vs. logged-out users. Management noted that while ad impressions skew to logged-in users given longer sessions, from a monetization perspective the two cohorts do not differ meaningfully.

Dolphin Research believes there remains a meaningful difference between logged-in and logged-out users. Management’s view may hold when brand ads dominate. As performance ads scale, logged-in users provide richer first-party signals and profiles than logged-out users, enabling more precise targeting, higher conversion, and greater commercial value. Therefore, subsequent U.S. user growth trends (tracked via high-frequency app data) will continue to shape investor confidence and sentiment on Reddit’s growth.

On valuation, the pre-earnings market cap of $28.1bn was roughly flat vs. last quarter’s post-earnings level, implying no gains over the past two months. Two main drags were 1) concerns over the lack of login/log-out disclosure, and 2) negative headlines on competition and share shifts.

On our updated estimates, a $28.1bn cap implies 2026 multiples of 33x GAAP P/E and 21x Non-GAAP P/E, not demanding vs. an approx. 40% 3-yr profit CAGR. With shares up 13% pre-mkt, there still appears to be room (e.g., at 40x P/E in line with growth, another ~10%). Near-term downside risk is a continued macro downturn, where advertisers both tighten budgets and favor top platforms with steadier ROI.

Details follow:

1) User metrics: U.S. growth remains slow

Q1 DAUs reached 127 mn, a net add of 5.4 mn QoQ. WAUs rose 23% YoY, a net add of 21.5 mn, and user stickiness (DAU/WAU) was 25.7%, flat QoQ.

By region, U.S. growth, which contributes the bulk of monetization, continued to slow from an already modest base. International DAUs grew 26%. Machine translation now covers 30+ languages globally.

2) Monetization continues; Q2 guide implies a notable slowdown, likely macro and conservative practice

Q1 revenue was $730 mn (+69% YoY), roughly flat QoQ and beating estimates. Management guided Q2 revenue growth to +45%, which we attribute to a tougher base, macro noise from geopolitical tensions, and the team’s habitually conservative stance.

Growth is driven by ads, expanding from brand to performance, with higher ROI lifting CPMs and ad load to gain share. Performance ads are scaling via DPA, which lets advertisers plug in product catalogs for Reddit’s AI to match to user interests and community context, dynamically displaying relevant items. Feed ads are next on the roadmap.

Data licensing revenue is recognized ratably over contract terms and thus remains stable. Key customers include Google, OpenAI and Perplexity for model training. The three-year Google and OpenAI deals expire at year-end and are likely to renew, and Reddit also aims to deepen integration so AI answers cite Reddit content and enable more revenue sharing.

3) Margins continue to trend up

Q1 GPM expanded 100 bps YoY, while dipping slightly QoQ on seasonality. Versus peers, the level is approaching an upper bound.

Sales & marketing remained the fastest-growing opex line at +80% YoY, though slower than last quarter, likely to promote ad products and user acquisition. Overall opex ratio improved by 14 ppts, and SBC as a share of revenue fell from 22% to 12% YoY.

The company targets a 50% Adj. EBITDA margin; Q1 was 40% with seasonal softness vs. Q4, and the trajectory remains upward. FCF hit a record high at 47% of revenue, consistent with an asset-light, cash-cow ad model.

The $1 bn repurchase announced last quarter formally commenced in Q1, with only $5 mn spent to buy back 35k shares. Net cash was $2.7 bn at quarter-end, and quarterly FCF has reached $300 mn, so sustaining the program is not challenging. That said, the pace is slow and the $1 bn authorization has no expiry, so shareholder yield cannot yet be annualized.

Dolphin Research on Reddit: historical work

Earnings (recent)

Oct 31, 2025 Minutes: Reddit (Minutes): Core search WAUs reached 70 mn

Oct 31, 2025 Earnings Take: Reddit: Another big beat — how did expectations reset pre/post print?

Aug 1, 2025 Minutes: Reddit (Minutes): Core search WAUs reached 70 mn

Aug 1, 2025 Earnings Take: Hugging Google tightly, Reddit sprints on the road to monetization

Risk disclosure & statement: Dolphin Research disclaimer and general disclosure