Reddit, Inc. (RDDT) experienced significant market volatility after releasing its fourth-quarter earnings for 2024. Although the social media platform’s revenue rose impressively, the company reported user growth substantially below Wall Street expectations, leading to its shares falling as much as 15% in after-hours trading.
The numbers tell quite the story. Reddit managed to achieve revenue of $427.7 million, marking a remarkable 71% increase compared to the year prior. This figure exceeded analysts' predictions of approximately $405 million. This growth reflects the success of Reddit’s efforts to capitalize on digital advertising and strategic partnerships, such as those with AI giants OpenAI and Google.
Yet, the earnings per share were $0.36, which fell short of the expected $0.48 based on analyst estimates, as per Bloomberg consensus. The platform also reported daily active users (DAU) averaging 101.7 million, missing expectations of 103.8 million. These disappointing numbers sparked concern among investors who viewed the miss on user growth as pivotal.
Steve Huffman, CEO and Co-Founder of Reddit, expressed optimism about the quarter's accomplishments. “It was another strong quarter as we accomplished exciting milestones across revenue and international growth,” he stated, setting the stage for what appears to be increased focus on enhancing user experience, fostering community engagement, and cultivating additional revenue streams.
Huffman attributed some of the user growth shortfall to fluctuations resulting from Google’s search algorithm changes, which he referred to as “volatility.” He noted, “What happened wasn't unusual — referrals from search fluctuate from time to time.” The algorithm's modifications primarily affected logged-out users who often rely on search engines to navigate to the platform.
Despite the user metrics falling short, Reddit’s operational performance showcased several positive trends. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) amounted to $154 million; this surpassed analyst expectations of $128 million. Reddit also reported net income nearly quadrupling to $71 million from $18.5 million the previous year, signaling strong profitability.
Reddit’s performance reflects broader trends within the digital advertising sector. Companies like Amazon, Snap, and Alphabet (Google's parent company) have also unveiled solid growth metrics, positioning Reddit favorably for continued recovery and expansion. Reddit has implemented features like conversation placement ads to directly incorporate brands within subreddit discussions, enhancing user engagement and advertising effectiveness.
Looking forward, Reddit has provided positive guidance for the first quarter of 2025, projecting revenues between $360 million and $370 million. This estimation aligns with emphasis on leveraging data licensing deals and heightened advertising revenue. Analysts maintained their optimistic outlook leading up to Reddit's Q4 report, reiteratively recognizing the potential for sustained growth.
While Reddit’s user growth may have slowed, the social media platform's strategies to convert logged-out users to logged-in profiles remain pivotal. Huffman mentioned on the earnings call, “Our teams have navigated numerous algorithm updates and did an excellent job adapting to these latest changes effectively.” The company's commitment to innovation and performance improvements signals promising developments for the coming quarters.
Nevertheless, analysts expressed concerns. Jefferies' analyst John Colantuoni commented on the potential risks tied to Google's search algorithm, indicating, “U.S. user growth slowed more than expected on Google algorithm changes.” While the changes were perceived as disruptive, the overall sentiment surrounding Reddit reflects cautious optimism, especially with the surging interest surrounding AI content integration.
Jeremy Goldman of eMarketer remarked, “Reddit shares are down in part due to Daily Active Users missing expectations, but it's not the best reason for anyone to lose faith in the company.” This perspective captures the mixed reactions from the market, where concerns about user numbers are tempered by recognition of strong revenue growth and strategic developments.
Reddit’s stock history has been notable since going public, rising dramatically from the initial offering price of $34 to levels exceeding $216 earlier this year. The platform remains on numerous analysts' buy lists, seeking to leverage the burgeoning digital advertising market amid committed user engagement strategies.
It’s evident Reddit is positioning itself for potential breakthroughs, as multimedia experts eye the platform's capability to attract unique users and adapt to industry trends.
Overall, as Reddit continues to tackle challenges head-on, industry watchers and users alike remain attentive to the platform's evolution and its capacity to improve both user experience and revenue streams. The digital social management space is one to watch this year.