Reddit (RDDT -1.81%) investors had plenty to cheer about after the company recently reported third-quarter earnings. The company smashed through earnings and revenue estimates. It then raised its fourth-quarter guidance ahead of what analysts had been modeling, prompting a slew of analyst upgrades and higher price targets. The stock has soared roughly 58% since that report, aided by a broader rise in the stock market after Donald Trump's victory in the presidential election.
However, the company didn't just report good numbers, it also achieved a major milestone in the third quarter. CEO Steven Huffman just delivered wonderful news for Reddit investors.
The business is finding its stride
Most internet users have likely engaged with Reddit before. If you've ever typed a question in a Google search bar, there is a good chance you've found yourself on a Reddit subpage, where people ask questions that others answer. The most liked responses climb the board and become more visible. Reddit's simple user interface has made it a go-to source for information and advice.
What might be less clear to the general public is how Reddit makes money, as it's not so obvious when you use the site. Almost all of the company's revenue comes from ad sales on the company's mobile app and website. However, the company also monetizes the platform through data licensing, Reddit premium subscriptions, and other sources that are currently immaterial.
Needless to say, user growth and engagement are key to driving revenue. On Reddit's recent earnings call, Huffman, who co-founded the company at just 21 years old, delivered some wonderful news to investors regarding engagement:
I'm excited to share that Q3 was a landmark quarter for Reddit. We averaged over 97 million DAUqs [daily active unique users], an increase of 47% from last year. And for the first time, we exceeded 100 million DAUqs a few times during the quarter, which has been a long-standing milestone for us. Our Q3 revenue grew 68% year over year, and I'm proud to announce that we also achieved GAAP profitability.
DAUqs are users that the company can clearly identify with a profile on the site and who have visited Reddit or opened the app at least once within 24 hours. Management believes this is the key metric investors should use to measure engagement on the platform.
Setting up a long runway
Since going public earlier this year, Reddit has done some interesting things to boost monetization. It used artificial intelligence (AI) to translate pages into other languages to be more widely read and interacted with globally.
You may have also noticed that Reddit pages appear more frequently in Google searches. "Reddit" is now the sixth most searched word on Google in the U.S. and the company is using the search giant to become more accessible to existing users while driving a whole new cohort of users who stumble upon the platform accidentally. Analysts also see the potential for Reddit to strike AI licensing deals and be a source for companies to train their AI and machine-learning models. Other media and content companies have already forged lucrative deals with AI companies.
Ultimately, Reddit is only as valuable as the user base and engagement it can create on the platform. The fact that Huffman disclosed the company finally hit the 100 million DAUq milestone bodes well for the company and is wonderful news for investors. Reddit's average revenue per unique user (ARPU) is still quite low at $3.58 globally. History tells us that this number should move higher if there is strong organic engagement and user growth, setting up a potentially long road ahead to create shareholder value.
