Reddit's Earnings May Just Be the Beginning: A Closer Look at the Company's Financials

Reddit's (NYSE:RDDT) recent earnings report shows strong performance, with a negative accrual ratio of -0.69 for the year to June 2025. This indicates good cash conversion and that earnings understate free cash flow. However, the company has been issuing new shares, diluting shareholder ownership. Despite this, Reddit's free cash flow improved over the last year, and analysts' estimates suggest potential future profitability.

Reddit Inc. (NYSE: RDDT) has delivered a robust second-quarter 2025 earnings report, showcasing significant growth across multiple metrics. The company reported earnings of 45 cents per share, which exceeded the Zacks Consensus Estimate by 25 cents. This marks a substantial improvement over the year-ago quarter, where Reddit incurred a loss of 6 cents per share [1].

Revenue for the quarter totaled $499.63 million, a 77.9% year-over-year increase and 16.9% above the Zacks Consensus Estimate. The company's daily active unique users (DAUq) surged 21% year over year to 110.4 million, while weekly active unique users (WAUq) rose 22% to 416.4 million. Advertising revenues, a significant contributor to Reddit's revenue, surged 84% year over year to $465 million [1].

Despite the strong financial performance, Reddit has been diluting shareholder ownership through new share issuance. This dilution, however, has not deterred the company from achieving a negative accrual ratio of -0.69 for the year to June 2025. This ratio indicates that the company's earnings understate its free cash flow, which has improved over the last year. Reddit generated $111 million in cash from operating activities in the second quarter, compared to $127.6 million in the previous quarter [1].

Reddit's operating expenses also increased, with non-GAAP sales and marketing expenses rising 68.8% year over year to $120.6 million. Research and development expenses increased 37.7% to $196.6 million, while general and administrative expenses rose 0.4% to $68.8 million. However, these increases were offset by a substantial increase in adjusted EBITDA, which jumped to $167 million from $40 million in the year-ago quarter [1].

Looking ahead, Reddit expects revenues between $535 million and $545 million for the third quarter of 2025, with adjusted EBITDA projected to be between $185 million and $195 million. The company's shares have seen a significant pre-market jump of 14.07% to $183.8 after the earnings report [1].

GoDaddy Inc. (GDDY), another significant player in the tech sector, has also shown strong performance. The company reported a 21% growth in free cash flow for the second quarter of 2025, raising its full year free cash flow guidance to approximately $1.6 billion. GoDaddy's CEO, Amanpal Singh Bhutani, highlighted the transformative potential of Agentic AI for the company's Airo platform, emphasizing its ability to handle complex multistep tasks for customers [2].

In conclusion, Reddit's strong second-quarter performance, despite shareholder dilution, indicates a company focused on growth and cash conversion. With improved free cash flow and positive analyst estimates, Reddit is poised for potential future profitability. Meanwhile, GoDaddy's robust growth and AI-driven initiatives underscore the sector's resilience and innovation.

References:
[1] https://finance.yahoo.com/news/reddits-q2-earnings-beat-estimates-165400584.html
[2] https://seekingalpha.com/news/4482153-godaddy-raises-2025-free-cash-flow-guidance-to-1_6b-as-ai-initiatives-accelerate-customer