AltIndex Called the Reddit Rally Early. Should Investors Take Profits Now?

August 1, 5:44 pm

Reddit (RDDT) stock soared over 17% on Friday after the company delivered an impressive second-quarter earnings report that beat Wall Street expectations across key metrics. The social media giant’s revenue surged 78% year over year to $500 million, marking its fastest growth in three years and significantly outpacing the $425 million estimate compiled by Bloomberg. Adjusted earnings per share (EPS) came in at $0.92, comfortably ahead of the expected $0.72.

The results highlighted the platform’s ability to monetize its unique community-driven structure, even as some user metrics presented mixed signals. Reddit reported 110.4 million global daily active users (DAUs) during the quarter, slightly ahead of analyst expectations of 110 million. However, US DAUs came in at 50.3 million, just below the 50.5 million expected - a sign that competition for attention in the US market remains intense.

CEO Commentary and AI Growth

During the post-earnings analyst call, CEO Steve Huffman acknowledged challenges stemming from Google’s search algorithm changes, which have caused traffic fluctuations. “Traffic from Google varies from week to week, but overall it was a headwind in Q2,” Huffman said. He emphasized that the company saw “better traction” in attracting US users as the quarter progressed, suggesting that some of the initial volatility may be stabilizing.

One of Reddit’s emerging growth drivers is its AI-powered search tool, Reddit Answers, launched in December 2024. Weekly active users for the feature climbed to 6 million, a sharp increase from 1 million in the previous quarter. Huffman underscored the platform’s strategic advantage in this area: “Reddit is one of the few platforms positioned to become a true search destination.”

Data Licensing and Revenue Diversification

While advertising remains Reddit’s primary revenue stream, the company’s “other revenue” segment - which includes data licensing - grew 24% year over year to $35 million. Recent high-profile deals with Google and OpenAI, each worth around $60 million, underscore Reddit’s position as a key data source for training AI models. Huffman noted that Reddit is now the No. 1 most cited domain for AI models, according to Profound, which he described as a “huge opportunity” for the company moving forward.

Q3 Outlook and Analyst Upgrades

Reddit’s outlook for Q3 exceeded expectations, with the company forecasting revenue of $535 million to $545 million, compared to Wall Street’s estimate of $473 million. Adjusted EBITDA is projected at $185 million to $195 million, far above the $159.5 million consensus.

Reflecting the strong results, Bank of America (BofA) raised its price target on Reddit from $150 to $180, citing a solid Q2 beat and upbeat guidance. However, BofA maintained a Neutral rating, cautioning that much of the optimism is already priced into the shares.

AltIndex’s Early Prediction and Investor Returns

At AltIndex, we’ve been bullish on Reddit since early this year. In March, when RDDT was trading at $107, we issued a buy signal based on a combination of traditional and alternative data metrics, especially focusing on web traffic. Investors who acted on this signal have seen an 80% return in less than six months - a testament to the power of alternative data-driven insights.

Now: A Mixed Picture

Despite Reddit’s explosive revenue growth, our latest alternative data points suggest caution for new buyers at current levels:

• Web Traffic: Reddit’s global web traffic is down an estimated 8% year over year, signaling slower organic user acquisition.
• Google Trends: Search interest for “Reddit” has steadily declined since early 2025.
• Mobile App Downloads: Downloads of Reddit’s iOS and Android apps are down an estimated 17% year over year.
• Social Media Presence: Instagram followers are down 2%, Twitter (X) followers are declining and TikTok is flat.

Our Take: Hold for Now

While Reddit’s 78% revenue growth and expanding data licensing partnerships are undeniably impressive, the alternative data signals paint a more cautious picture. Declining web traffic, lower app downloads, and weak social media engagement suggest that user growth could be plateauing. For investors, these metrics are critical because they provide an early look at the company’s ability to scale its ad revenue and maintain cultural relevance.

For now, our AltIndex signal on Reddit leans towards “Hold.” Investors should keep a close eye on web traffic trends, app usage, and engagement metrics in the coming quarters. A sustained rebound in these areas could present another buying opportunity.

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