CK Capital
Defense/Space/Tech/Photonics Investor, Co-Owner of CV Research
Reddit's selloff has nothing to do with the business, which scores 109 on the Rule of 40. Last quarter revenue grew 69% with a 40% adjusted EBITDA margin, net income was $204M, free cash flow $311M at a 47% margin, and cash stands at $2.8 billion; the Q4 print scored 115. In a real drawdown the market sells what is liquid and up, and quality does not protect against multiple compression. When the tape settles, the scores will still be there and the fear will not. x.comÂ
Reddit is one of the best businesses in the market because millions of users create its content for free while it monetizes the conversation at a 91.5% gross margin. Q1 revenue rose 69% to $663M, its seventh straight quarter above 60% growth, with a 31% net margin and $312M of operating cash flow on $1M of capex. Its 25 billion-plus posts and comments of authentic human conversation are a licensable data moat for AI training that grows more valuable as AI scales. x.comÂ
Reddit's US ARPU growth is more impressive than the market credits. It rose 40% since March to $14 per quarter, while trailing free cash flow reached about $1.2B in September. The US daily-user chart is less flattering. x.com x.comÂ
Reddit's fundamentals have disconnected from its share price. Revenue is growing 61%, US revenue per user 51%, and net margin is 31%, yet the stock is down 34% this year. x.comÂ
Reddit's Q3 drop in US daily users risks another poor market reaction, even if headline earnings are strong. Last quarter a slight sequential decline in US daily users sent the shares down 20% despite a massive triple beat; the new chart shows a further sequential drop in Q3. x.com x.comÂ
Reddit pairs ridiculously good growth with clean financials. It grows without making the rest of the business worse through excessive stock-based compensation or falling margins, and clean financials matter a lot. x.comÂ
Reddit's selloff after its Q2 report makes no sense given amazing earnings, making it a great buying opportunity. Per Jonah Lupton, revenue rose 61% to $805M against $730M expected, EBITDA rose 107% to $343M, and Q3 revenue guidance of $865M topped the $829M estimate. x.comÂ
Reddit's worsening US user growth threatens its revenue runway despite elite ARPU growth, revenue growth and margin expansion. US daily users fell 2% year over year and missed estimates by 7%; the Q4 guide was weak. It needs healthier user growth in its most important market to dispel Google/AI discovery fears. Forward indicators do not look promising, and the trend of positive estimate revisions will end. x.com x.comÂ
Reddit's push toward required logins could improve targeting and monetization but may hinder search discovery and add friction for casual users. Revenue rose 53% to $895M and free cash flow reached $363M, yet overall user growth lagged despite a good showing from US logged-in users; stock-based pay was higher than desired. Google will probably pressure near-term DAU growth. The finances remain solid, but the login strategy's impact on growth needs more clarity. x.com x.com x.com x.comÂ
Reddit's 61% revenue growth and 177% EPS growth at a 30 P/E make it easy to imagine it working out well, even if its management is detestable. x.comÂ
Reddit's main business is declining and its data licensing business is too limited to make up for it. x.comÂ
Reddit still looks undervalued as Needham's Q3 traffic tracker shows app downloads up 19% and web visitors up 2-3% quarter over quarter, adding to strong alternative data behind an expected Q3 beat and raise. Shares trade at 18x next-twelve-month EPS while revenue is growing 60-65% and EPS 65-70% year over year; new Anthropic, OpenAI or Gemini licensing deals remain possible over the next couple of months, not secured. x.comÂ
