Reddit Rides on Solid Momentum in Ad Business: A Sign of More Upside?

Core Insights - Reddit (RDDT) is experiencing significant growth in its advertising business, with Q2 2025 advertising revenues increasing by 84% year over year to $465 million, driven by deeper investments from existing advertisers and a 50% rise in active advertisers [1][11] Advertising Growth - The increase in advertising revenue is attributed to both existing advertisers increasing their spending and a substantial rise in the number of active advertisers, showcasing Reddit's appeal to a diverse range of businesses [1] - User engagement is also on the rise, with daily and weekly active users increasing, along with improvements in Average Revenue Per User (ARPU) and the introduction of new advertiser tools such as DPA, Reddit Pixel, and CAPI [2] User Engagement and Tools - Reddit Answers has seen remarkable growth, with weekly users jumping from 1 million to 6 million in Q2 2025, contributing to enhanced impressions and pricing for ads [3] - The platform's focus on automation and usability is improving its advertising capabilities, integrating tools like Smartly to leverage audience and performance data with AI, facilitating easier campaign management for advertisers [4] Competitive Landscape - Reddit faces strong competition from companies like Meta Platforms and Snap, which are also enhancing their advertising strategies to capture market share in the growing digital ad space [5] - Meta Platforms reported a 21.5% year-over-year increase in advertising revenue to $46.56 billion in Q2 2025, while Snap's advertising platform saw a 39% increase in purchase volume for commerce advertisers [6][7] Stock Performance and Valuation - RDDT shares have increased by 55.6% year to date, outperforming the broader Zacks Computer & Technology sector, which returned 18.9% [9] - Despite strong revenue growth, RDDT is considered overvalued with a forward Price/Sales ratio of 18.86X compared to the sector's 6.91X, and it holds a Value Score of F [12] - The consensus estimate for RDDT's 2025 earnings is $1.81 per share, indicating a projected year-over-year growth of 154.35% [14]