Reddit Q2 2026. The quarter was actually fine, the drop was drastic.

Secret_Swordfish4121 · 2026-08-02T17:55:14+00:00

=== SUMMARY === - Reddit Q2 2026 was fundamentally strong: revenue $805M (+61% YoY), EPS $1.25, operating margin 28.8%, yet the stock fell 21% after Q3 guidance implied slowdown to ~48% growth. - Author argues growth is shifting from user/impression expansion to pricing power (ad prices +40% YoY vs impressions +17%), while US logged-in users are flat and AI licensing backlog shrank. - Despite risks, author sees the drop as drastic relative to the quarter and is interested in opening a small long position in RDDT. - Quality: Well-researched DD with specific financials, prior thesis review, and clear acknowledgment of what was wrong vs what held up. === SENTIMENT === BULLISH === TRADE IDEAS === RDDT - LONG | confidence: 0.75 | sentiment: +0.30 Speaker: u/Secret_Swordfish4121 Thesis: 1. THE FACT: Q2 revenue +61% YoY, EPS $1.25, operating margin expanded to 28.8%; the 21% selloff came from Q3 guidance deceleration, not from a broken quarter. 2. THE BRIDGE: The market is pricing in a sharp growth cliff, but ad pricing power (+40% YoY) and international user growth (+28%) still support a reasonable deceleration, creating a potential mispricing after the drop. 3. THE VERDICT: Author is interested in opening a small position because the core ads business remains profitable and high-margin, while the market's reaction appears overdone relative to actual Q2 results. 4. RISKS: US logged-in users are nearly flat and this metric stops being reported; AI licensing backlog shrank to ~$92M; advertisers may push back on continued price increases; Google algorithm changes are now a cost headwind, not a growth driver. Timeframe: medium-term Key Points: - Q2 rev $805M +61%, EPS $1.25 beat - Q3 guide ~48% growth triggered selloff - Ad prices +40%, impressions only +17% - US logged-in users flat; intl grew 28% - AI licensing backlog shrank to ~$92M

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Summary

Reddit Q2 2026 was fundamentally strong: revenue $805M (+61% YoY), EPS $1.25, operating margin 28.8%, yet the stock fell 21% after Q3 guidance implied slowdown to ~48% growth.
Author argues growth is shifting from user/impression expansion to pricing power (ad prices +40% YoY vs impressions +17%), while US logged-in users are flat and AI licensing backlog shrank.
Despite risks, author sees the drop as drastic relative to the quarter and is interested in opening a small long position in RDDT.
Quality: Well-researched DD with specific financials, prior thesis review, and clear acknowledgment of what was wrong vs what held up.

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I posted a breakdown of Reddit's **Q1** filing [here](https://www.reddit.com/r/ValueInvesting/comments/1ubr41x/the_case_on_reddit_stock_rddt/) back in June. The new filing came in Friday and the stock dropped 21% in a day. This post will also go through the Q2 filing and check how much of what we discussed in June actually held up.

**TL;DR**

* The quarter itself was strong. Revenue $**805M** (**+61%** YoY), operating margin **28.8%** (up from **27.6%**), EPS **$1.25**. Nothing broke.
* The **21%** drop was due to the guide in the filing. **Q3** guided to about **$865M**, roughly **48%** growth, against **61%** this quarter and **69%** two quarters ago.
* Growth has quietly changed shape. Ad prices **+40%** YoY, ad impressions only **+17%**. One quarter ago it was an even **32/32** split. They're essentially charging more, not showing more.
* US logged-in users: **23.1M** vs **22.9M** a year ago, basically flat AND this metric stops being reported next quarter.
* What I got **wrong** in June: I said user growth would keep decelerating, the way it had from **51%** down to **17%** over eight quarters. This quarter it ticked up.
* What held up: the AI licensing story is still only **\~5%** of revenue, and the contracted backlog actually **shrank**.

\----------------------------------

**The Q2 stuff that matters**

Reddit is now growing mainly by raising prices, on a user base that isn't compounding much in its most valuable market (US). Pricing power is the higher-quality half of ad growth, it costs nothing to acquire and drops almost straight through a **91%** gross margin. Unfortunately, it has a ceiling that adding users doesn't, and you can't see advertisers pushing back until they already have.

The other thing is the Google dependency finally showing its face. From the shareholder letter:

&gt;

In Q1 the filing credited search algorithm changes as a **driver** of user growth. In Q2 the same disclosure lists them as something they had to spend to offset. Sales and marketing was up 62%.

**Where I was wrong, and where I wasn't**

**Wrong**: The user growth deceleration, **51**% down to **17**% over eight quarters, and I assumed it would continue decelerating. Q2 came in at **18**%, the first uptick in two years. US users grew **6**% while international grew **28**%.

**Right**: I argued the AI-data licensing everyone owns this stock for was \~**6**% of revenue and shrinking as a share of the mix. It's \~**5**% now. The contracted licensing backlog fell from \~**$121M** to \~**$92M** in a single quarter, and the slice committed to **2027** barely moved.

So at \~**10x** trailing sales, how far do you think Reddit can push advertising prices up while maintaining an okay-ish user growth? I am currently interested in opening a small position in Reddit!

You can find a full analysis of the second quarter of Reddit &amp; the impact of machine translation on Reddit's growth on my free substack:

[https://open.substack.com/pub/secaura/p/the-current-state-of-reddit-rddt](https://open.substack.com/pub/secaura/p/the-current-state-of-reddit-rddt)

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u/Secret_Swordfish4121 Reddit r/ValueInvesting

Q2 revenue +61% YoY, EPS $1.25, operating margin expanded to 28.8%; the 21% selloff came from Q3 guidance deceleration, not from a broken quarter. The market is pricing in a sharp growth cliff, but ad pricing power (+40% YoY) and international user growth (+28%) still support a reasonable deceleration, creating a potential mispricing after the drop. Author is interested in opening a small position because the core ads business remains profitable and high-margin, while the market's reaction appears overdone relative to actual Q2 results. US logged-in users are nearly flat and this metric stops being reported; AI licensing backlog shrank to ~$92M; advertisers may push back on continued price increases; Google algorithm changes are now a cost headwind, not a growth driver.

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