Clinging tightly to Google's coattails, Reddit is racing down the path of commercialization.

$Reddit(RDDT.US) surged over 15% after releasing better-than-expected results. Is this truly a flawless report? What are the specific flaws? Dolphin Research will discuss briefly;

1. Points of Surge—Monetization Progress Exceeds Expectations + Google Partnership Upgrade

Reddit is still in the early stages of commercialization and is supported by Google, the leader in advertising, making it one of the few platforms in North America with high user growth. As a result of management's comprehensive efforts in advertising tools, AI search intelligence, and building a large client sales team, second-quarter advertising revenue achieved an accelerated year-on-year growth of 84%, significantly exceeding market expectations.

Meanwhile, the guidance for third-quarter revenue also implies a monetization expansion of over 50%, 15% higher than market expectations. The financial report reveals that Google is testing Reddit's comment section data for large model training, indicating that Reddit's real user data is relatively scarce and increasingly recognized for its value, suggesting that data licensing revenue still has room for expansion, at least in the short term.

2. "Hidden Concerns" Amidst the Celebration—The Pain of North American Traffic Dependency Growth

However, behind the impressive performance lies a flaw, which is the issue of North American user growth starting from the fourth quarter. As an old platform, Reddit's true organic traffic has long peaked on its own, relying mainly on the interest binding with Google since 2023—Reddit authorizes data to Google for large model training, and Google makes Reddit content more visible in search results.

But the downside of relying on a big brother is that the lifeline of traffic growth is in the hands of the big brother. In the fourth quarter of last year, Reddit experienced a quarter-on-quarter loss of North American users for the first time, causing a major shock. The company explained it as an adjustment to Google's search algorithm, which had recovered since January. However, the actual recovery of North American users remains slow, with only 2 million new users in Q1, and management also expressed that traffic gradually recovered in April.

But in Q2, North American users only increased by 200,000 quarter-on-quarter, with the main source of new platform traffic coming from the other half of the international market, driven by AI translation demand upgrading the product experience.

Meanwhile, the login ratio indicator reflecting user stickiness is also declining overall. Of course, this partly reflects the low initial stickiness of the influx of new international users.

Generally, the ad monetization rate in international markets is not high, and with too many new international users, the ad revenue per DAU will be diluted. However, the reality is that the ARPU per DAU has increased by over 50% year-on-year, indicating a deepening monetization of the overall stock users—simply put, users are seeing more ads, and the brands are more premium.

This feeling of traffic dependency is certainly not good in the long run. Moreover, Google is currently undergoing self-reform, accelerating the penetration transformation of AI Overview. Therefore, whether Reddit can continue to gain direct traffic from the current cooperation state in the long term is uncertain. This is the risk that Reddit needs to bear for its high valuation.

3. Rising Sales Expenses, Possibly Filling the Pressure of Traffic Growth

The gross margin in the second quarter remained stable, and the GAAP operating margin significantly improved to 14%.

However, the 70% increase in sales expenses appears somewhat abnormal. Dolphin Research believes that, in addition to the sales team formed to connect with medium and large brand clients, there is also the operation of external traffic buying to reduce the impact of Google's algorithm adjustments on traffic growth.

In one quarter, the AI Q&A assistant Answers grew from 1 million weekly active users to 6 million, with a still low penetration rate. The future hope is to better integrate with search content, providing advertisers with a complete advertising placement and conversion experience.

4. Overview of Key Indicators

Dolphin Research's View

In the short term, due to early monetization and the light asset operation of advertising, the pace of performance growth is mainly in the company's own hands. Whether it is advertising commercialization or data authorization, explosive growth is very likely. Therefore, despite the high valuation (implied 26-year P/S 10x), this high prosperity (AI translation international user growth; product form, advertising tool upper limit advertising opening change; data authorization value being more recognized, etc.) can support a period of high performance growth.

Therefore, Dolphin Research expects that there is still room under positive market sentiment, and although participation is difficult, it does not prevent some funds from being attracted to speculate.

However, in the medium to long term after this year, Dolphin Research suggests being more cautious. Relying on external traffic growth methods is always unreliable, and a healthy internal ecosystem is the real skill. Now that Reddit's internal user page views and other stickiness indicators are starting to show some decline (in the U.S. region). If, in addition, Google's presentation of search results truly undergoes AI-based modifications to present AI-summarized search content, how can we expect a new round of traffic expansion? This is also an unavoidable issue for Reddit to consider when thinking about long-term development after passing the easiest tailwind period.

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Dolphin Research on "Reddit" Historical Research

Financial Reports

February 12, 2025 Minutes "Reddit (Minutes): The User Mindset of Professional Search is Forming"

February 12, 2025 Financial Report Commentary "Reddit: Does Growth Depend on Big Brother's Face? High Valuation is the 'Sword Overhead'"

In-depth

December 24, 2024 Initial Coverage "Reddit: The American Version of 'Zhihu + Tieba', Why Can the Old Tree Sprout New Shoots?"