🏆 Reddit Fell 20% For Winning

Reddit $RDDT ( ▼ 20.99% ) fell more than 20% after earnings. Its biggest drop since it IPO'd two years ago.

The crime? Apparently being too useful to artificial intelligence.

Revenue grew 61% year over year. Free cash flow jumped 135%. The market looked at all that and hit sell.

Is this a broken business, or a broken narrative worth buying?

Let’s figure it out.

The bear case is simple. AI answers questions directly, so nobody clicks through to Reddit anymore, so the traffic dries up and the ads go with it.

But here’s where that idea falls apart a little. Those same AI models are built partly on Reddit's archive.

Semrush ran 325,000 unique prompts across 12 major industry categories and found Reddit was the single most cited domain by LLMs. Worth flagging: that data is dated January 2026, so treat it as directional rather than gospel.

Most people slot AI exposure into three buckets. Software distribution, the models themselves (Gemini, Claude, ChatGPT), and infrastructure.

Reddit sits in a fourth bucket nobody prices: the raw material. Millions of humans typing real experiences, with other humans voting on whether it was any good.

You can spin up infinite synthetic text. You can't spin up twenty years of people arguing about which mattress actually gave them back pain.

So if the data is that valuable, why isn't Reddit swimming in cash from it?

Well it kind of is.

It's collecting, just not much yet. "Other Revenue," the bucket holding the licensing deals with Google and OpenAI, came in at $43M, up 24% year over year.

That's roughly 5% of quarterly revenue. Rounding error money for a company sitting on the most-cited dataset in AI.

CEO Steve Huffman's framing on the call was that Reddit's content is not commodity content, and the deals are anything but binary.

His point: there are at least four separate ways models use Reddit. Training (teaching the model facts), post-training (teaching it how to talk like a person), grounding (checking its answer against something real), and search indexing.

Commodities get priced by supply. Reddit is arguing it's closer to a monopoly on authentic human opinion. And as AI becomes more common, real human opinion is only going to get more valuable.

That's the long game. The short game looks even better.

While everyone panicked about hypothetical future traffic, Reddit posted a quarter that would embarrass most of the S&P.

EPS of $1.25, beating estimates by $0.29. Revenue of $805M, beating by nearly $74M.

US revenue hit $638M (+56%). International hit $167M (+84%). Gross margins came in at 91.3%, a touch better than last year.

The ad engine did the heavy lifting: advertising revenue of $762M, up 64%, driven by both higher pricing and more impressions. The expanded Shopify integration now plugs millions of merchants into that audience.

This was the eighth consecutive quarter of 60%+ revenue growth. Guidance for next quarter: $860M to $870M, or 47% to 49% growth.

Net income more than doubled to $253M. Users showed up too, with daily active uniques up 18% to 130.3M and weekly actives crossing half a billion for the first time at 514.6M.

That's a weekly audience bigger than the population of the European Union.

So why is this thing still down 38.4% year to date?

Because the fundamentals aren't the problem. The stock is down 5.6% over twelve months and gave back the entire May rally.

First, valuation. Reddit’s pretty expensive based on current earnings. Trading at a forward P/E of 35.75x against a sector median of 16.08x, and a forward P/B of 8.29x versus 1.90x. You're paying up. Own that. The question how valuable is the monopoly they’re building?

Second, retention. CFO Andrew Vollero admitted paid marketing was mixed and that the real unlock is keeping users, where Reddit sits below peers. Product work has retention up 50% this quarter, and the new "people are the best" campaign is running, so this is fixable rather than fixed.

Third, geography. Roughly 85% of net user growth came from international markets, where revenue per user is far lower than the US. Great optics, thinner monetisation.

None of those are dealbreakers. The next one might be.

Wells Fargo reports Reddit is reconsidering its AI licensing deal with Google.

Walk away and roughly $500M of licensing-related revenue walks with it.

There's a subtler risk too. Renew on weak terms and the market learns that Reddit's pricing power over its own data is softer than the bull case assumes.

Either outcome resets the story. Which is exactly why the next few months matter more than this quarter did.

Yes, with eyes open. This is a strong buy at these levels, and the volatility is the entry point.

You're buying a business compounding revenue at 61% with 91.3% gross margins, doubling profits, and sitting under the entire AI stack while getting valued like it's about to be disintermediated by it.

Wall Street's average price target is $218.17, which is +55.09% upside from current price. Quant systems have it rated a strong buy too based on growth and momentum despite that pricey valuation.

What would change our mind: Google walking away entirely, retention flatlining after this quarter's 50% improvement, or two consecutive quarters of decelerating ad revenue. Any of those and the multiple has nothing to stand on.

Absent that, this looks like the market pricing one side of the AI trade and forgetting the other exists.