Artificial-intelligence chatbots are leaning more and more on Reddit these days. The company once called the “Front Page of the Internet” has only begun to cash in on that.
That wouldn’t seem the case from Reddit’s latest earnings report. Revenue surged 78% year over year to just under $500 million in the second quarter, marking the company’s best growth rate since early 2022—two years before it went public.
But most of that came from advertising, which accounts for the vast bulk of the company’s business and grew 84% from a year earlier. Reddit’s “other revenue,” which is comprised mostly of licensing deals it has struck with OpenAI and Google, accounted for only 7% of total revenue during the quarter.
Clearly, Reddit’s near- and midterm future relies on advertising, which means it needs human users visiting its site. But ad revenue has been a bit unpredictable as queries to AI chatbots begin to replace some traditional internet search traffic.
Reddit reported a surprise decline in U.S.-based daily active users in its fourth-quarter report six months ago, which was blamed on a “periodic algorithm change” by Google. That happened to coincide with the widening deployment of Google’s “AI Overviews,” which offer up chatbot-like replies to traditional search queries.
It was a small decline—a 0.4% drop from the previous quarter. But for a heavily-shorted stock that had surged sixfold from its IPO price, that was bad enough. Reddit shed more than half its market value over the following two months.
The stock has since clawed back most of that lost ground, thanks in part to data from third-party providers showing Reddit as a top-cited source for queries from ChatGPT, Perplexity and Google Gemini. Reddit was the top source for Google and Perplexity from August of 2024 though last month, according to a June 5 report from search analytics firm Profound.
Another report last month from search analytics firm Ahrefs showed Reddit appearing in 5.5% of Google’s AI Overviews responses, the most of any source. Reddit’s position as a repository of knowledge shared and curated by actual people is a big part of the appeal.
“Human conversation is not being replaced by AI, instead, it’s becoming more important,” Reddit Chief Executive Steve Huffman said on the company’s earnings call.
Indeed, people are still key. Along with the surging growth in ad revenue, Reddit’s U.S.-based daily active users rose a bit to 50.3 million during the quarter, surprising analysts who had expected another decline. Reddit’s stock price has jumped 24% since its earnings report last week.
“Someone asked us how fast revenues would need to grow to overcome the user story, and we guess that answer is 78%!” Bernstein analyst Mark Shmulik wrote in a report after the earnings.
With the stock coming back to its post-IPO peak, Reddit will need to keep the momentum going. There is a good chance it can. Its platform is proving to be a more attractive draw for advertisers looking for an engaged audience that is often focused on commercial subjects—such as users seeking opinions on what products to buy.
Dan Salmon of New Street Research estimates that around 40% of all conversations on Reddit have commercial relevance, creating a sweet spot for the company in the “consideration” phase of shopping.
Reddit’s popularity as a source for AI-powered search engines is also an asset, which should lead to more licensing deals in the future. Revenue from those deals won’t likely displace advertising as Reddit’s main source of income, but it adds high-margin dollars to a business already commanding industry-leading gross margins of 91%.
Reddit’s AI story is only in the early chapters.