The market is being very stupid about Reddit’s Q2 report, after its weakness in US DAUq combined with comments about ‘choppy’ search referral traffic.
This rising era of “Google Zero” (zero click-through) from AI search summaries has the market way too skittish here.
Yes, US DAUq (daily uniques) retreated -300K sequentially. It means users that were using the site/app daily didn’t engage every single day in the middle of summer. Those users are now likely in US WAUq (weekly uniques), which grew +700K.
The market is forgetting that net new DAUq in Q2 is always seasonally weak. A sequential pullback like this has happened 6 times in 6 years, half of which were in a Q2.
What I think is vastly more important as a gauge of Reddit’s ongoing executional success is their +64% ad revenue growth. This primarily comes from higher user engagement (more opportunities for ad impressions) and a rise in ad pricing from improved ad performance and/or higher demand. (Another lever they have is the number of ad impressions over a piece of content, which they thankfully pull infrequently. The COO says so when they do, and she did not mention it.)
If you invest in Reddit, you need to downplay the importance of DAUq/WAUq in your quarterly measures of executional success. These user-focused KPIs mask the fact that mgmt isn’t giving you enough info to gauge user engagement & ad impressions on your own. So you have to trust the revenue numbers and ARPU (rev per DAUq) being generated as your primary view.
DAUq/WAUq KPIs only tell you frequency of visits. It tells you nothing about the amount of user engagement per visit and from that, the number of ad impressions served to the user over that time.
As a rough example of why the underlying user engagement is the key factor (which DAUq is a secondary input into):
- A daily user might be coming to the site for 5 minutes per day (35min a week).
- A weekly user might be coming to the site two days a week for an hour each (120min a week).
These 2 users end up with wildly different engagement times that are completely masked by these “critical” KPIs. In this case, that weekly user is driving over 3x the enagement (by length of time on the site) of that daily.
We also have no idea what each user is doing in that time per visit: are they reading long threads in the comments? visiting multiple posts in rapid fire without diving in depth into comments? moderating a subreddit? scrolling a feed? using DMs? or watching linked videos on a single page? A user watching linked videos are not generating anywhere near the same amount of ad impressions than a user reading deep into the comments across multiple posts.
So the real levers for Reddit operationally are in how many ad impressions and what types of ads and content (posts, comments, feeds, searchs) a user is exposed to during that each visit, and ultimately, the performance of their ad engine in matching these ads to high-intent users.
ARPU rose +51% in the US despite the sequential drop in DAUq. That tells us that Reddit is successfully improving ad monetization through higher engagement and improved ad performance leading to higher pricing/demand.
The ‘choppy’ click-through from AI search summaries are giving everyone across the open web some slight to severe weakness in referrals. Reddit has several paths forward should it worsen (including its still ongoing data licensing renegotiation with Google). But all of the signs within revenue/ARPU are pointing to continued strong execution by the Reddit team over the levers they can control.
-muji, large position in RDDT that is likely getting larger