Reddit’s User Warning Puts Its Cash Growth to a Fourth-Quarter Test

Reddit enters the fourth quarter after reporting higher revenue and cash flow through September, while warning that declining search referrals could reduce its daily audience in the months that follow.

The shares fell 29% on October 30, the day after the company’s results and earnings call, according to Trefis. Trefis also cited news reports that attributed the drop in part to a revenue outlook below Wall Street expectations. Reddit shares lost 45.7% over the 12 months through November 4, while the S&P 500 gained 14.9% over the same period.

Search referrals fell as daily users grew in the third quarter

Reddit reported an average of 130.3 million daily active uniques in the third quarter, up 12% from a year earlier. Weekly active uniques rose 16% to 515.2 million. The daily measure averages identifiable users who visited the website or opened the app during a 24-hour period.

Management’s warning concerns a later period. According to Trefis, executives said on the October 29 call that search referral traffic fell meaningfully in the third quarter and dropped by an average of more than 1 million referrals a week in October. Total sessions were also down because of the search traffic decline.

If the October pace continues, management said daily users could fall by a low double-digit percentage in the fourth quarter from roughly 130 million. The potential decline is a forecast, not a reported result.

Reddit said daily app users and logged-in daily users grew from the preceding quarter in both the US and the rest of the world. The company did not give the sizes of those groups or quantify their quarterly growth.

According to Trefis, management said people using the app or logged in account for 80% of what Reddit earns from users. Reddit shifted part of its US marketing from the web toward app installs and plans to begin testing a logged-in-only version of Reddit in selected markets outside the US during the fourth quarter.

Third-quarter revenue rose 53% to $895 million

Reddit reported third-quarter revenue of $895 million, up 53% from $585 million a year earlier. US revenue rose 50% to $719 million, while international revenue increased 67% to $176 million.

Advertising generated $847 million of the total, up 54% from a year earlier. Other revenue rose 35% to $48 million. For the 12 months through September, revenue increased 62.2% from the preceding 12-month period, according to Trefis.

Net income rose to $283 million from $163 million a year earlier, and diluted earnings per share increased to $1.40 from $0.80. Gross margin was 91.5%, compared with 91% a year earlier. Adjusted earnings before interest, taxes, depreciation and amortization rose to $402 million from $236 million.

Reddit’s operating cash flow increased to $364 million from $185 million. Free cash flow rose to $363 million from $183 million, while capital spending was $1 million in the latest quarter.

Trailing free cash flow reached $1.2 billion

Reddit generated $1.2 billion in free cash flow over the 12 months through September, compared with $510 million in the preceding 12 months, according to Trefis. Trailing 12-month free cash flow was below zero in September 2023 and has risen at every quarter-end since then.

Trefis put Reddit’s operating margin for the latest 12-month period at 29.4%, up from 13.8% a year earlier. Capital spending amounted to 0.55% of cash from operations over the latest period.

At the end of September, Reddit held $3.03 billion in cash, cash equivalents and marketable securities. Trefis put debt at $31.4 million. It calculated a free cash flow yield of 6.1% for Reddit, compared with 4.1% for the median S&P 500 company.

Reddit spent $100 million repurchasing approximately 670,000 Class A shares during the third quarter, at an average price of $149.81 per share. Fully diluted shares outstanding were 206.3 million at September 30, down 0.3% from the preceding quarter.

Fourth-quarter guidance implies slower revenue growth

Reddit expects fourth-quarter revenue of $1 billion to $1.03 billion and adjusted EBITDA of $480 million to $510 million. According to Trefis, the revenue range implies year-over-year growth of 38% to 42%, compared with the 53% growth reported for the third quarter.

Reddit’s next results are expected in February 2027, according to Trefis. They will cover the quarter in which management warned daily users could decline if the October pace of search referral losses continues.