By Adam Clark
Reddit's first earnings report as a public company knocked expectations out of the park. However, the social-media company is still facing questions about the sustainability of a surge in users and Google search traffic.
Wall Street sees other ways, however, for Reddit to drive revenue growth beyond a rise in traffic.
On Tuesday, Reddit posted March-quarter revenue that crushed estimates helped by a 37% surge in daily active unique visitors from the same period a year before. Reddit shares jumped 3.2% to $50.96 in Wednesday morning trading.
Executives said the visitor increase was partly due to a boost in traffic from Alphabet's Google search engine. In response, analysts questioned whether it was somehow related to Reddit's deal to license its content to Google for training artificial intelligence, and whether such growth would be sustainable in future.
Reddit management insisted there was no direct link between the content-licensing deal and the platform's increase in traffic. Instead, they attributed increased Google search traffic to better website performance improving Reddit's ranking in search results. They also pointed to 27% growth in logged-in users -- meaning users who have accounts on the site and therefore are less likely to have arrived via a Google search -- as proof of growing engagement.
"The biggest factor driving user growth is the performance and product quality, because that's what's driving retention and so retention compounds into growth over time," Reddit CEO Steve Huffman said during the earnings call.
It's particularly important for Reddit to be able to prove the explosive growth isn't dependent on a Google algorithm change -- because that could be susceptible to being reversed or altered. It's also clear that Reddit needs more content-licensing deals with AI partners, like the one it struck with Google, to keep growing.
Reddit's 48% rise in revenue for the quarter was primarily driven by advertising, but executives told analysts they expect slower growth going forward, as inflation and geopolitical and election uncertainty could potentially affect brand campaigns.
That means Reddit likely needs to show continued progress on data-licensing deals to generate the growth that is already priced into its stock. The company has a market valuation of more than $6 billion, despite generating adjusted earnings of just $10 million for the March quarter and revenue of $243 million.
"While no new GenAI [generative AI] licensing deals were struck, we viewed the management tone as confident with respect to ultimately aligning on more licensing partnerships," wrote Raymond James analyst Josh Beck in a research note on Tuesday.
Beck raised his target price on Reddit to $65 from $50, and reiterated a Strong Buy rating on the stock.
Write to Adam Clark at adam.clark@barrons.com
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(END) Dow Jones Newswires
May 08, 2024 11:17 ET (15:17 GMT)
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