Reddit: Search Worries Overshadowed an 8-Beat-In-A-Row Quarter — Buy The Selloff

The headline about Reddit CEO Steve Huffman selling $2.88 million in shares is a distraction. The actionable event is the one that happened four weeks earlier: Reddit crushed Q2 earnings, raised guidance, and watched its stock fall 9% after hours. That is the gap between operating performance and market sentiment that makes a stock interesting.

The selling is mechanical, not directional

Huffman sold 18,000 Class A shares on August 4 at prices around $154-$160. He exercised stock options with a strike price of $25.29 — shares that cost him roughly $455,000 — and sold them for $2,876,017, pocketing a gain of roughly $2.4 million on the spread. The transaction was executed under a Rule 10b5-1 trading plan adopted on May 19, 2025, more than a year before this sale. A 10b5-1 plan is a pre-arranged selling schedule that allows insiders to dispose of shares without timing the market or trading on nonpublic information.

This is the seventh consecutive 18,000-share sale by Huffman in 2026 alone. He sold the same block size in February, twice in March, April, May, and July. Following the July transaction, he retained approximately 456,000 shares worth roughly $90 million, plus about 1.1 million options. His economic stake sits at roughly 3-4% of the company. Despite the modest ownership percentage, Huffman holds veto power over major corporate decisions through Reddit's dual-class share structure, which gives Class B shares ten votes each versus one vote for public Class A shares.

The selling pattern is a textbook post-IPO liquidity event. Huffman is monetizing deeply in-the-money options under a fixed schedule. It's not a signal of conviction loss. It's a signal of a plan that was set more than a year ago and is executing exactly as filed.

The real story is what happened on July 30

Reddit reported Q2 earnings on July 30 that beat across every major metric:

• Revenue of $805 million, up 61% year-over-year, versus a $730 million consensus
• Diluted EPS of $1.25 versus 95 cents expected
• Gross margin of 91.3%, up 50 basis points from the prior year
• Operating income of $231.7 million, up from $67.7 million a year ago
• Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization — a rough proxy for cash earnings) of $343 million, a 42.6% margin, up 106% year-over-year
• Free cash flow of $261 million, or 32% of revenue

This was the eighth consecutive quarter of revenue growth above 60%. The company also issued Q3 guidance of $860-$870 million in revenue (above the $828 million consensus) and $385-$395 million in adjusted EBITDA (above the $368 million estimate).

Despite beating on revenue, EPS, margins, user growth, and guidance, Reddit's stock fell 9% in after-hours trading. The trigger was CEO Huffman's comment that search referral traffic had been "choppy" and volatile late in the quarter, linked to Google's expansion of its AI-powered search summaries, which route fewer clicks to external websites like Reddit.

The market priced this as an existential threat to a traffic model built on search visibility. I think it's a second-order concern to a business that has already demonstrated it can grow revenue at 60%+ through direct app engagement and advertising pricing power.

The operating picture remains compelling

The user growth numbers tell the story that matters more than search volatility. Global daily active users reached 130.3 million, up 18% year-over-year and above the 129.9 million estimate. Weekly active users crossed half a billion for the first time, reaching 514.6 million, up 24%. Average revenue per user globally jumped 36% to $6.18, with U.S. ARPU up 51% to $11.85.

This is not a company growing only by acquiring low-quality search traffic. It's a company growing revenue per user while expanding its active base. The ad revenue engine, which accounts for $762 million of the $805 million total (95% of revenue), grew 64% year-over-year, driven by both impressions and pricing. The remaining $43 million in "other" revenue — primarily from data licensing deals with OpenAI and Google — grew 24%.

The margin profile is the standout feature. A 91.3% gross margin is rare for any internet business and reflects a cost structure dominated by hosting and bandwidth, with relatively low variable costs per user. Adjusted EBITDA margins are projected to hit approximately 45% at Q3 midpoint, approaching levels seen at the most profitable social platforms. The company also achieved a milestone of $1 million in revenue per employee.

The company repurchased 1.5 million shares for $235 million during Q2, at an average price of $157.57. Combined with $2.786 billion in cash and marketable securities on the balance sheet, the financial position is strong.

Where the risk actually lives

The search traffic concern is real even if it's overstated. Huffman acknowledged that traffic from Google referrals was more volatile later in Q2, partially offsetting product-led user growth gains. Google's AI Overviews have dramatically reduced click-through rates to external websites across the internet, and Reddit's international revenue — which grew 84% year-over-year but relies heavily on machine-translated content — is particularly exposed to this shift.

The logged-in daily user base grew only 7% year-over-year to 52.6 million, a deceleration from earlier quarters. The bulk of daily activity still comes from logged-out users (77.7 million, up 27%), who are more casual and less valuable to advertisers.

That said, the company's response has been constructive. Management emphasized its shift toward direct, repeat app usage rather than "drive-by" search traffic. Product improvements produced a 50% relative year-over-year increase in new app user retention. The planned overhaul of feed technology and expansion of the Reddit Max automation suite for small businesses suggest the team is investing in engagement and monetization infrastructure, not just hoping search referrals return to prior levels.

Valuation compressed without the business breaking

This is where the setup becomes actionable. Before the earnings-driven selloff, Reddit traded at roughly 38 times trailing earnings. After the 9% after-hours drop and subsequent weakness, the stock settled around $154-160 in early August, implying a trailing P/E near 32-33x.

The multiple contracted roughly 15% while revenue grew 61%, operating income tripled, and Q3 guidance beat consensus. The valuation reset is larger than the business impairment. That's the definition of a mispriced dip.

Reddit still trades at roughly five times trailing sales — expensive in isolation, but the comparison set matters. The company is one of the few publicly traded internet platforms combining 60%+ revenue growth with GAAP profitability and 30%+ free cash flow margins. Its closest growth peers — Snap, Pinterest, Match Group — trade at significant discounts on multiples but also deliver substantially lower growth rates and, in Match's case, declining revenue. Meta trades at 22 times earnings but only grew revenue 28% last quarter and is spending tens of billions on AI infrastructure that has yet to show a clear return.

Reddit's valuation is rich relative to mature internet companies. It is defensible relative to companies actually growing revenue at 60% while generating 32% free cash flow margins. The key question is whether that growth rate persists as the company scales past the $3 billion annual revenue threshold.

The catalyst clock

Q3 results, expected in late October or early November, will be the next inflection point. Guidance implies roughly 47-49% revenue growth and adjusted EBITDA margins near 45%. If Reddit delivers that while keeping search traffic deterioration contained, the stock has a clear path back toward the $180-190 range where it traded before the selloff. If search referral declines accelerate and logged-in user growth stagnates further, the 60% growth franchise narrows enough to justify the lower multiple.

Verdict: Buy

Huffman's latest option exercise and sale is a non-event — mechanical, pre-planned, and consistent with a year-long pattern. The earnings selloff, however, created a genuine disconnect. Reddit beat on revenue, EPS, margins, user growth, and guidance while its stock fell on a traffic concern that has not yet materialized into a revenue problem. The multiple reset from 38x to roughly 33x earnings is too large for a company that delivered its eighth consecutive 60%-plus revenue growth quarter with triple-digit EBITDA expansion and $261 million in free cash flow.

The risk is real — Google's AI overviews represent a structural shift in search referral economics that Reddit hasn't fully solved. But the company's direct engagement growth, advertising pricing power, margin profile, and balance sheet give it room to work through the transition. At the current price, the valuation has absorbed more fear than the business has experienced.

I'd buy. Watch Q3 guidance for evidence that search traffic stabilization is underway and that the 60% revenue growth rate remains intact.