Reddit shares slide lower despite impressive quarter, upbeat guidance; Lock up expiration looms

Reddit (RDDT) reported strong Q2 earnings, significantly surpassing analyst expectations for both revenue and adjusted EBITDA. The company posted revenue of $281.2 million, well above the consensus estimate of $253.6 million, representing a year-over-year increase of 54%. Adjusted EBITDA was $39.5 million, compared to the expected $13.2 million. Despite these impressive results, shares dropped by 4.5% in after-hours trading, reflecting some investor concerns.

The strong results failed to attract buyers as the stock slipped lower in after hours trade. The news highlights some of the concerns around its valuation despite outpacing EBITDA expectations and guiding EBITDA for the upcoming quarter above expectations. The recent IPO does face a lock up expiration on August 9 which may be keeping buyers on the sidelines. The price action highlights some of the investor caution that remains.

Key metrics highlighted Reddit's robust growth. Daily Active Users (DAUs) increased by 51% year-over-year to 91.2 million, surpassing the estimated 84.7 million. Average revenue per user (ARPU) was $3.08, slightly above the $3.00 estimate. Additionally, Weekly Active Uniques (WAUs) grew by 57% year-over-year to 342.3 million, underscoring Reddit's expanding user engagement.

In terms of guidance, Reddit provided an optimistic outlook for Q3. The company expects revenue between $290 million and $310 million, compared to the consensus estimate of $278.69 million. Adjusted EBITDA is projected to be between $40 million and $60 million, exceeding the analyst estimate of $32.9 million. This positive guidance suggests continued strong performance in the coming quarter.

Despite the strong financial performance, Reddit did not announce a stock split. However, the company has a lock-up expiration on August 9, which could impact stock price volatility as early investors gain the opportunity to sell their shares. This factor, combined with the recent price action, where shares dropped 4.5% post-earnings, will be important to watch.

Reddit's revenue growth was driven by a 41% increase in ad revenue to $253.1 million and a remarkable 691% increase in other revenue to $28.1 million. The company's gross margin improved by 530 basis points to 89.5%, highlighting enhanced operational efficiency. Net loss was reduced to $10.1 million from $41.1 million in the prior year, demonstrating improved financial health.

The company's strong Q2 results also included a positive operating cash flow of $28.4 million and free cash flow of $27.2 million, an $82.1 million improvement from the previous year. CEO Steve Huffman attributed the success to platform improvements and increased user engagement, positioning Reddit well for continued growth.

In conclusion, Reddit's Q2 earnings report showcased significant revenue and user growth, strong adjusted EBITDA, and positive cash flow, although the stock price reaction was negative. The guidance for Q3 is optimistic, suggesting that the company expects its growth trajectory to continue. However, investors should be mindful of the upcoming lock-up expiration and its potential impact on the stock.