Why I Keep Buying Reddit Stock While Everyone Looks Away

Reddit is quickly becoming one of my favorite stocks. And while the recent performance has been disappointing, I believe that the market may be missing a much bigger story here. In this video, I'll break down what is hurting the stock, why I'm still confident in the long-term opportunity, and why I've been using this weakness to add to my position. Let's jump into it. Reddit Q2 ended up selling off like 22% on the day that they ended up showing off earnings. Yet, the expectations versus Wall Street ended up blowing past expectations. And we'll talk about that here in a second, but essentially we ended up seeing about $85 million in revenue up $61.1% growth year-over-year. Now, the interesting part about this is if you compare it to the quarters previously, you'd actually see that that growth rate is slightly down. But the comp that they ended up showing this growth rate off of is one of the highest comps that you can see in the past 3 years worth of history. 77.7% growth rate. So it even put up 61% growth on that amazing quarter is really a true feat. Eight quarters in a row of 60 plus% growth. Only very very few companies can end up showing off that level of success. Now they break this down into two different sections of revenue. One is advertiser revenue which actually has been growing much much faster than their overall revenue growth. And then the other section, which is other source revenue, things like buying gold and this sort of stuff within Reddit, grew about 24% year-over-year, but it's also the smallest part of the actual business. So, if you're talking about what's the most important part, it's the columns in blue here. And those are the ones that are growing the fastest and actually faster than overall revenue. It's a really good sign here from Reddit as well. They said, "I think our business is diversifying across many dimensions. That has made it really resilient. If you look across verticals, 11 out of the 15 verticals grew more than 50% year-over-year. Our active advertiser count grew over 70% and our scaled channel which houses mid-market and SMBs doubled. Rest of world grew 80 plus% and so our footprint is just getting way more diversified. Even though they break it out into just showing advertising revenue, the different types of advertising revenue is very important to know that those are diversifying. You're not just seeing growth in travel or something like this. It's across all different sections in different geographies as well. Gross profit margin was 91.27% which was actually up year-over-year about 50 basis points to $734 million on $85 million worth of revenue. Really, really strong. They said we saw margin tailwinds from incremental revenues and hosting efficiency programs offsetting increased use of compute use of higher AI and ML usage. So although they are pushing like many companies to use more and more AI more machine learning usage all of this stuff it still showed end up improving gross margins year-over-year which was really strong. In terms of other operating expenses you have sales and marketing general and administrative research and development. All of these are headed in the right direction, going slowly, lowering over time. So, really, really good signs there from Reddit as well. In stockbased compensation, we saw a little bit of a tick up uh year-over-year and especially quarter over quarter, which they did also say that this actually had to do with their grants specifically on Q2 that ends up showing up much higher. And they actually lowered their fullear expense guidance for stockbased compensation from high teens as a percentage of revenue to low to mid- teens percentages of revenue. To date, they said that they saw great leverage on this expense and that it's lowered to less than 13% of revenue to date. More than a thousand base points or 10% lower than the first half of last year. Now, going to that operating profit and operating margin, another great high here, $231 million, high operating profit margins as well. And then flowing all the way down into net income margin, 31.4%. Great efficiencies on their taxes. This company continues to print more and more money each and every quarter. Now, one of the big KPIs that you end up seeing from Reddit, and this was the thing that shocked me the most about the sell-off, was that people saw that there was a decrease in daily active users in the United States, which mind you is not even the first time that this has happened. From September of 2024 to December of 2024, we ended up seeing a very, very low amount of daily active users end up falling off. This is the exact same thing that happened. Mind you, we're now 5 million higher than the last time that we've seen this. while international users has just continued in this sort of linear increase over time. Reddit sold off on this sort of sign here. They said we did see headwinds in search referrals particularly late in the quarter which just happens to line up with the talk of them potentially selling data to Google. So is Google sort of fighting them back with their algorithms? Who knows? and they said that the visibility with the referral traffic remained low, but we're focusing on what we can control, which is our direct user driven by product efforts. We believe that this work will be transformational. It'll take time, but that's how we get to 1 billion global users and 100 million users in the United States. And they're talking about daily activives, not weekly activives, daily activives. The thing that really surprised a lot of people was the big big increase in average revenue per user on Reddit. While we ended up seeing this large increase in users in international markets and sort of a flattening, however, still up year-over-year on US consumers. These are like the two S-curves that are growing together. If you have more users over time and those users are well spending more through advertising on Reddit, that's really what's going to show up as being the greatest sign of creating a moat. Now, one of the ways that they do this, they end up saying that research from different firms ended up showing off that Reddit is delivering 1.5 times higher return on ad spend for consumer package good advertisers than any other social media on average across the United States and Western Europe. 1.5x. So, whenever you're looking at daily activives across both Europe and the US, like sort of their international and everything, you're seeing daily activives now at 130 million. This is what brought the stock down 22%. The truth is that even whenever you combine both US ARPO and international ARPO, meaning average revenue per user, it still climbed to new company heights, which is very hard to do a quarter after Q4 like you see back here in 2024. That did not happen. December was $342. It took them multiple quarters to then get back to that new height. They immediately beat Q4 two quarters after the holiday spend highs, which you can see are sort of the peaks each year. So, if that's going to be the peak and we end up increasing for the rest of the year, we're likely to head into the sevens, eights, or even $9 by this holiday spend, if they can continue to improve their ad platforms. Whenever we even look at weekly activives, this didn't even decrease for overall US space. That continued to increase. Remember, if the stock stayed flat or something like this, maybe you go, "Ah, well, I mean, it wasn't a blowout quarter." You could point to things that maybe you didn't like in the company's performance. But to drop 22%, you need to find some glaringly red and obvious signs from the company that this company is not the same thesis as what we were at before. That is not what we're seeing at all. We're seeing daily activives increase 18% year-over-year, weekly activives increase 24% year-over-year, while ARPO drastically increased across the entire company. They also said Max campaigns, which is their new products that they end up pushing out, are proving to drive better performance for advertisers and higher lifetime value customers. For example, Lenovo achieved 40% higher purchase volume with Max than with the standard campaigns, demonstrating how AIdriven optimization can turn high intent users into high value customers. Looking ahead, we plan to expand Max to the broader range of advertisers and make it the primary onboarding experience for SMBs. This only right now is just coming out of beta and they're already seeing amazing success with it. Look at this. The number of advertisers using Max grew 60% from Q1, 60% quarter over-arter, while Max revenue grew over 150% during the same period. We continue to add capabilities to the Max suite. In Q2, we added that app install objectives to Max campaigns and launched tailored creatives which use AI to identify relevant communities and audiences. So, they're improving their side, which is also why they can charge more for advertisers. And just like we saw from the previous experiences, if you're getting 1.5 times higher return with Reddit than other social media platforms, then they can charge a lot more for those experiences. They said when you look at the volume of conversions growing and clicks growing, what that means for an advertiser is that they're getting more outcomes at an equal or even better price. We're getting more competitive with all the signals, ML work, and optimization work that we're doing. And so the amount that they can charge, like we said, and the amount of customers that are going to keep coming back is only going to improve because all of that data flows into better data for the future advertisers, right? It's what made Meta such a big company. And yet, their efficiency in this business is only going to allow them to do this even more. Their cash position is dramatically higher than where their debt is. You might as well say this is a debt-free company at only $20 million. They could pay it off. It wouldn't even make a single dent. This is probably 0% interest debt. And so that's why they're not touching it. But for the most part, what you end up seeing is that the cash ended up only slightly increasing about 16 million. Still a very very good cash position. But they said we have the liquidity in cash capabilities to satisfy our three capital priorities, which was first investing back in the business. Second, opportunistic M&A mergers and acquisitions. Can we buy an advertising company that might be way oversold that can help us grow our business? or third, just repurchase shares while maintaining a high level of profitability. And so that's exactly what they did this quarter. $250 million was put back into the business to lower share counts while the stock had remained depressed. Now, after earnings, the stock ended up falling on this news, down 22%. So, what do you think they're going to do with that 700 million authorized amount that they have? massive cash position to end up utilizing that and obviously a very high free cash flow business. At some points in this business, we've seen as high as 47% free cash flow margins. This quarter was a little bit lower, which did end up affecting the stock, but that's not where they want to be long term. This didn't end up going into capex or anything like this. Capex actually represented 0.2% of their total revenue base. All you're seeing is the efficiencies of this company improving. They're now seeing on a last 12-month basis, their average employee ends up bringing in more than $1 million back to Reddit. On the other side, operating expenses have stayed mostly flat over that same year period. This is the efficiencies that Reddit is sort of seeing. And so, one of the other things that I wanted to talk about was guidance. Q3, they ended up showing off that they wanted to get about 48% revenue growth, 865 million in that mid-range at a 45% adjusted IBIDA margin. This was another thing that people pointed to and said, "Hey, you just did eight quarters in a row of 60 plus% growth rate and now you're telling us that next quarter is only going to be 48% growth on not as hard of a comp." And so this actually ended up spooking people saying, "Yeah, but the company is expecting to start slowing in that growth as they mature." That would end up showing that they only do about a little bit higher and that falling of growth just doesn't look very good. But look at last quarter. This is the interesting part. They have beat expectations every single quarter. This is a company that is known for sandbagging. Look, we're not seeing 2% beats, 3% beats. We're seeing 10% beats, 9%, 17%, 11%, 11% on EPS, how much earnings they're going to bring in, which is tied a little bit to adjusted IBIDA as well. They beat by 30%, 74%, 550%. So trying to guess how much they're actually going to make has also been completely inaccurate as well. Last quarter, this is exactly what they did. They ended up saying that they were going to grow by 44%. They said that they were going to do 40% adjusted EBA margins. This was their outlook for Q2. They said 715 to 725 million. If you remember from the beginning of the video, they did 805 million. They were completely off. So that 44% guide turned out to be 61% growth. that 40% adjusted EBIDA margin ended up being 42.6% adjusted EBIDA margins on a way higher amount of overall revenue. So this company is sandbagging like crazy. I would not look at their guidance and say, "Hey, this is a sign of weakness." I would say, "How much are they going to beat by this?" Because that's exactly what we've seen in the eight quarters going previously. But yet, even whenever you look at the valuation of Reddit, what you're buying into is a company growing at massive growth rates past eight quarters in a row, continuing to sandbag, improving Arpoo, and launching new products that are seeing the best benefits to the companies like their Max campaigns ever in Reddit's history. And you can now buy this company at essentially a 32 times PE ratio or even lower on a forward basis, which by the way, forward is what Wall Street is currently assuming. Like I showed you, Wall Street was assuming roughly a 48% growth rate on revenue, they're more than likely to end up beating that number. If the margins end up improving like it did last quarter, and the growth rate also improves, what is a forward guidance overall? If it's way sandbagged, this number in reality could be somewhere as close to 16 times, potentially even lower if they continue to beat the way that they have in previous quarters. And the same can be said about free cash flow. Free cash flow 26 times on a trailing basis. forward price to free cash flow 17 times. 17 times for a company that has grown massively, improving margins, improving revenue, beating everyone's expectations across the top and bottom line, and you can buy this company at 17 times price to free cash flow. This company is mispriced. There was a long time where you can look back here and say, "This company is expensive, but it's growing quickly." But now it's growing quickly and it's no longer expensive. That is the best opportunity whenever it comes to investing is whenever the market says something has to come down and it obviously does not end up slowing down in its growth rate. More users are using it. Our poo continues to climb and they're actually getting better and better at doing so because they get more data from their new customers that are coming on the platform. I'm loving Reddit here. I'm absolutely a buyer. But you let me know what you guys are