Reddit's AI Ad Strategy Boosts Holiday Quarter Forecast

What Happened

Reddit has forecasted its fourth-quarter revenue to surpass Wall Street estimates, thanks to its AI-powered advertising tools. These tools are attracting more marketing spending, leading to a 9% increase in shares after hours. The company's AI-optimized ad platform allows advertisers to place targeted ads directly within relevant discussion threads across its interest-based communities, known as subreddits. This approach has pulled in a broader range of clients, lifting the active advertiser base by more than 75% in the third quarter. Chief Operating Officer Jen Wong highlighted that Reddit is also in the early stages of testing an end-to-end automated campaign platform. This platform uses AI to streamline campaign setup, further enhancing the efficiency of their advertising strategies.

Why It Matters

Reddit's vast content library has become a prized asset as AI companies hunt for data to train their large language models. This technology is behind chatbots like ChatGPT. Reddit has secured licensing deals with Alphabet's Google and Microsoft-backed OpenAI, and it has also cracked down on allegedly illegal data scraping by companies like Perplexity AI through lawsuits. According to Jeremy Goldman, senior director of briefings at Emarketer, Reddit must continue to protect its intellectual property to sustain its upward trajectory. Despite a slowdown in the growth of Reddit's U.S. daily active unique visitors (DAUq) in the third quarter, global DAUq rose 19% to 116 million. Additionally, the average revenue per user increased by 41%, indicating strong monetization efforts. For the fourth quarter, Reddit expects revenue to range between $655 million and $665 million, surpassing analysts' average estimate of $637.9 million. The company also forecasts fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be between $275 million and $285 million, exceeding estimates of $258.8 million.

Our Take

Reddit's positive results are a promising sign for a company competing in a crowded social media market dominated by platforms like TikTok and Meta. Meta also reported robust third-quarter revenue, thanks to its AI ad efforts. However, Reddit's U.S. logged-in DAUq growth slowed to 7% in the third quarter, down from 11% in the previous quarter. This slowdown is something to watch, but the overall global growth and increased revenue per user are positive indicators. The company's third-quarter revenue rose by 68% to $585 million, beating estimates of $545.7 million. This impressive growth highlights the effectiveness of Reddit's AI-driven ad strategy and its potential to compete with larger social media platforms. As Reddit continues to innovate and protect its intellectual property, its future in the competitive social media landscape looks promising.