Reddit's Q4 Earnings Report: Advertising Monetization Ignites, but Dependence on Google Drags Down DAU

TradingKey - Reddit stock (RDDT) price went down 5% the day after they reported Q4 results. The financial aspects of the results were good with earnings and revenue both above expectations:

• Earnings per share: 36 cents vs. 25 cents expected
• Revenue: $428 million vs. $405 million expected

However, investors were disappointed by the slight miss in the number of daily active unique users (DAUq) of 101.7 million, 1.4 million less than the expected 103.1 million.

Despite the negative reaction, the results appear to be good. Reddit revenue continues to grow at very high rates of 60-70% and the margins are expanding (GAAP Gross Margin went from 88.4% to 92.6% in Q4 compared to same quarter last year).

Advertising businesses like Reddit are easily scale-able because the incremental revenue growth they can achieve far outpace the incremental costs they have to incur in order to operate. Further to this, the overall advertising business environment is in a good state at the moment as companies are willing to pay extra for ad space (something we see in Meta and Google already). Reddit is on the right track to achieve sustainable profitability.

The underwhelming DAUq number can be explained with the changes in the Google algorithm, likely a one-off issue that has already been fixed.

In terms of outlook, Reddit remains a very high-prospect social media, as they offer a unique value proposition to users, different from that of Meta platforms and other competitors. However, there are certain risks including reliance on Google algorithms and potential obstacles of ad targeting due to the stronger anonymity of users.