Reddit: "The death of Reddit"

And the symbiotic relationship between Google and Reddit

Reddit stock has been under pressure in recent months due to multiple fears, including Google algorithm changes, competition from Amazon, amongst others.

I share more in the article below why I think these fears are likely noise to the Reddit RDDT 0.00%↑ investment thesis.

Furthermore, Reddit’s accelerating ad revenue growth of 61%, 70% operating leverage, 29% EBITDA margins demonstrate management continues to execute well.

The article will be split into the following sections

1. Solid results and guidance

2. “The death of Reddit”

3. Long history of success navigating Google’s algorithms

4. Symbiotic relationship between Google and Reddit

5. Other business updates

6. Valuation

7. Conclusion

Let’s get started.

Solid results and guidance

I will briefly share my views on 1Q results and 2Q guidance before diving into material updates about the company.

Global Daily Active Uniques (“DAUq”) grew 31% from the prior year to 108.1 million, 1% ahead of consensus.

Global ARPU grew 23% from the prior year to $3.63.

This led to revenues growing 61% from the prior year to $392.4 million, 6% above consensus.

Advertising revenue grew 61% from the prior year to $358.6 million, coming in 7% above expectations. Advertising revenue was driven by both impressions and advertising pricing growth Y/Y.

Other revenue, which is primarily data licensing reached $33.7 million, up +1.5% sequentially, was in-line with expectations.

US DAUq of 50.1 million grew 21% from the prior year (2% below expectations), though US ARPU of $6.27 grew 31% from the prior year, leading revenue to grow 57% from the prior year to $313.9 million, 7% above consensus.

International DAUq of 58.0 million grew 41% from the prior year, 4% expectations as International ARPU of $1.34 grew 24% from the prior year, leading revenue to grow 82% from the prior year to $78.5 million, 5% above consensus.

Adjusted EBITDA of $115.3 million was above consensus of $103 million.

Adjusted EBITDA margin was 29.4% in 1Q25, 3 percentage points ahead of consensus expectations of 26.4% margin.

There was 70% operating leverage as revenue outpaces expenses growth by 3x.

This comes even as Reddit reinvested its hosting savings and grew headcount 13% from the prior year in Engineering (ML, Search & Answers, & MT) and Sales (expanding customer coverage).

Management guided for 2Q25 revenue of $410 million to $430 million or $420 million at the midpoint, 7% above consensus.

2Q25 adjusted EBITDA is expected to be $110 million or $130 million (28.6% margin at the midpoint), compared to consensus of $103 million.

This suggests high-margin flowthrough following Reddit’s revenue outperformance.

“The death of Reddit”

There are some on WallStreet stating that it is the beginning of the end for Reddit as Google changes its algorithms and launches AI search tools.

Firstly, with the launch of AI Overviews, some investors worry that this provides users with more direct and summarized answers within the search results without needing to enter the Reddit website.

I think this is rather simplistic as anyone who has used AI Overviews would know that it has its flaws, and users who specifically want to find information on Reddit would still want to end up there.

Apart from AI overviews, Google’s newfound emphasis on E-A-T (Expertise, Authoritativeness, Trustworthiness) standards in its algorithm was another worry for investors.

E-A-T has been a cornerstone of its search quality guidelines, especially in the context of content credibility and user trust. This emphasis is more pronounced in light of AI-generated content, misinformation, and user demand for reliable information.

What is E-A-T?

E-A-T is part of Google’s Search Quality Evaluator Guidelines, used by human raters to assess the quality of search results.

Expertise: Content should be created by someone with relevant knowledge or credentials.

Authoritativeness: The source (site and author) should be widely recognized in its field.

Trustworthiness: The site and content must be honest, safe, and transparent (for example, secure domain, clear author bio, factual content).

In the next section, I will elaborate more on how Reddit sees these algorithm changes and its long history of effectively dealing with it.

Reddit is also actively developing its own AI-powered search “Reddit Answers.”

It is clearly working because Reddit Answers has reached 1 million weekly users, and Reddit is starting global expansion of this new AI-powered search in Australia and the UK next.

Its proactive development of Reddit Answers could be the answer to help Reddit not only retain but growth users in its platform.

Ultimately, there’s the worry that these moves by Google could hinder Reddit’s user acquisition and advertising revenue.

Long history of success navigating Google’s algorithms

Reddit has navigated many of Google’s algorithm changes and updates over the years.

For example, in 4Q last year, Reddit saw some volatility from Google search that was triggered by a periodic algorithm change.

In this particular case, the algorithm change recovered in less than a quarter and interestingly, the company saw an increase in the query term Reddit after this algorithm change.

I think this does suggest that users have the specific intention to arrive at Reddit, even when the algorithm does not pick it up.

Management shared that in the last 90 days, the word Reddit was the sixth most searched word on Google.

There are 2 main types of users on Reddit.

There are those who scroll and those who seek.

Scrollers are those looking to engage with the core community in Reddit and engage in a conversation with others on certain matters.

Seekers want to find answers to their questions on Reddit.

Both scrollers and seekers would naturally be wanting to land on Reddit when they make their queries on Google.

Google updates and changes their algorithms about twice a year.

So, these algorithm changes happen every year and it is just something that Reddit has to deal with and something it has grown to effectively deal with.

Symbiotic relationship between Google and Reddit

The question that is probably most prominent here is does Google want to exterminate Reddit or can Reddit and Google co-exist in a mutually beneficial relationship.