A note before the post:

Illiquid Alpha is about places the market isn’t looking, and Microsoft is one of the most-covered stock on earth. This is an exception, not a change of direction.

It’s here because the piece is really about being late: I finished the work a week after the price I wanted had come and gone. But I think it’s still work publishing - after all, my first Reddit post also said that, at the price back then, Reddit was not a buy. But I laid out my thesis and provided a target price, which I had acted upon since.

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The two Microsofts

Microsoft is running two main businesses lines with opposite economics. One sells software subscriptions at an 81.5% gross margin. The other sells compute at 57.1%, down 330bps year on year. The first grew revenue 14%, the second 32%.

The market spent twelve months deciding which one Microsoft is becoming, concluded it was the second, and then reversed the entire judgement during the past week. The shares peaked at USD 466 on 1 June 2026, but then fell and started trading in the USD 350-400 range into the 29 July results. This is also when I started to look at the company, as my preliminary analysis was showing that USD 350 could be the buy window - unfortunately I haven’t finished setting up my mind before the earnings, upon which Microsoft re-rated to just under USD 500. The ten-year average multiple is above 31x; the shares now sit at about 27x trailing earnings, against roughly 20x forward before the results.

Note on fiscal years: Microsoft’s ends 30 June, so FY26 Q4 is the June quarter and the fiscal year is complete.

Part 1 - The reframe

Software moats have historically rested on the difficulty of building software. If an enterprise-grade application took three years and forty engineers, whoever had already built it was safe. As coding is getting dramatically cheaper, that barrier is collapsing. And when building stops being scarce, it stops being where the profit is.

What remains scarce is everything else:

• Customer relationship, track record and ease of integration - How difficult is it to switch / integrate the new software? Will you get fired for choosing this vendor & not everything goes according to plan?

• Permissions - who is this agent, whose authority does it act under, what may it touch

• Proof - what did the agent do, and can that be shown to an auditor in eighteen months

• Integration into the record - where the output lives, who sees it, how long it is retained

None of the above are engineering problems - especially in the bullish AI scenario, engineering is getting commoditized. But that is not to say Microsoft is becoming a compliance and integration business. Microsoft is not becoming an integrator. It is changing the category of software it sells, from productivity software to governance software, while keeping the licence model and margin structure intact.

The evidence is in the new flagship bundle. M365 E7, launched 1 May 2026 at USD 99 per user per month, is E5 + Copilot + Agent 365 + Entra Suite. Three of those four components are governance products. Microsoft has built its most expensive seat ever and the majority of it by value is permission and proof rather than productivity.

Two months in, E7 has been bought by hundreds of enterprise customers covering millions of seats. Management explicitly credits Agent 365 - observability and manageability of token spend - as the component customers respond to. That is the thesis working faster than I expected.

In every row Microsoft concedes the capability layer and monetises the control layer. That is a deliberate repositioning onto the part of the stack that gets more valuable as capability commoditises.

The June-quarter confirmed this, with Agent 365, two months after launch, has nearly 40 million agents registered across tens of thousands of companies, and the usage of other 4 significantly up as well.

But, there remain risks. First, the moat and the antitrust target are the same object. A business whose value comes from being the mandatory checkpoint is, in regulatory language, a gatekeeper.

Second, toll economics decouple you from value created. A governance layer earns a fee per agent or per seat, not a share of what the agent produces. If agents generate enormous value, Microsoft collects USD 15 per user per month regardless. Being the toll booth is much better than being a prospector and much worse than owning the gold - and it is not what you want your primary business to be. This is also because, as you are becoming “the only bridge in town”, the upside you can charge for starts being capped by the government.

Third, it is an incumbency moat, not a capability moat. AWS has IAM. Google has its own identity stack. What Microsoft has that they do not is 450m seats of installed base.

Part 2 - The Office franchise

The numbers

This was the first quarter in which serving Copilot visibly cost something at the gross line - hence why mild gross margin decrease. However, the operating margin was still ups 50bps YoY, meaning the franchise is currently not under pricing pressure.

For the future, growth comes from two main places. Seats: +6%, concentrated in small business and bottom-of-range bundles (low-ARPU clients), with no real seat growth coming from the existing enterprise base, as it is already fully saturated at c. 450m seats. ARPU is thus the key driver - Microsoft needs to move clients up the ladder, and management named Copilot, E5 and early E7 traction as the drivers for upgrades this quarter.

The ladder, post the 1 July 2026 increases is as follows: E3 USD 39 (from 36), E5 USD 60 (from 57), Copilot add-on USD 30, Agent 365 USD 15, E7 USD 99. At list, E7’s components would total c. USD 117, so it carries a c. 15% bundle discount to move a customer from 60 to 99.

To be noted, the blended realised ARPU across the base is roughly USD 19 per seat per month, not USD 60. Total revenue of c. USD 103bn across c. 450m seats comes to c. USD 229 per seat per year. This is because most seats are E3, Business or frontline packages at heavy discounts.

The moat

It is not in the applications themselves. Google Workspace has been cheaper, arguably better at real-time collaboration and aggressive in enterprise sales since 2010. During that period it has taken education, startups and much of small business, but has not taken the large regulated enterprise. That points to the fact that the product quality alone is not the moat here.

Surely, there is a better word processor somewhere out there, but Word is good enough and everyone else uses it. That combination - adequate plus universal - is far harder to attack than excellent.

What actually creates the moat then?

• Identity. A company wanting to leave Office either keeps Entra, in which case it still pays Microsoft and has saved a fraction of the bill for an enormous project, or replaces Entra too, in which case the project becomes “re-do authentication for every application in the company”, with a huge security incident risk.

• Compliance. In regulated businesses, documents are records subject to retention schedules, legal holds and eDiscovery. Purview enforces this. Migration to another project would be prove to document loss.

• The bundle. E5 at USD 60 includes endpoint security, data governance, device management, identity governance and BI. Microsoft’s product in each category is usually not the best available - but it does’t need to be - it needs to be adequate and already paid for.

• The buyer is not the user. The decision sits with a CIO and CFO negotiating a three-year agreement, whose incentives are very different to the underlying employees’. Neither will get fired for choosing Microsoft - but might be fired if he/she opts for a change of vendor, and change does not go smoothly.

There are some examples of this “bundle moat” working well. The EU forced Microsoft to unbundle Teams and sell suites without it from November 2025 - but Teams did not collapse and Slack did not recapture the enterprise. And on 1 July 2026 Microsoft raised prices c. 8% against a competitor bundling AI, with seats still growing 6%. Pricing power without volume loss is a proof of a moat.

Where the moat is not

Small business remains competitive. New companies default to competitors - Google Workspace, Slack, Notion and Linear. That does not hurt this decade, but it is how a moat dies over twenty years: not by losing customers, but by not being installed in the ones that get created.

This matters for how seat decline actually arrives. The intuitive bear case is that AI shrinks headcount at existing customers. The more likely mechanism is customer mortality - Microsoft’s installed base skews to large mature enterprises, and if those lose share to younger companies that never installed Microsoft, seats decline through the death and displacement of customers rather than through customers actually switching to competitors.

The seat question

A bear case is that AI writes the document, so nobody needs Word. But, if AI produces finished work that no human reviews or takes responsibility for, the white-collar worker has not lost their software - they have lost their job. There is no world where a knowledge worker exists, gets paid, and touches no document.

But if a human still reviews and signs off, they need an interface and permissions to open the document. That is a licence that Microsoft sells. If no human is involved at all, the question is not Microsoft’s Office revenue but the existence of white-collar employment, and Microsoft’s per-seat revenue is the least to be worried about in such a scenario.

To this end, Office is infrastructure, not a tool. It is closer to a monitor than to a specialised app. Someone who travels four days a week still has a monitor at their desk. Someone who delegates 90% of their drafting to an agent still needs to be able to open and edit the output.

But the number of seats remains a risk, as the revenue is seats times price. A firm employing 100 analysts to produce work might employ 20 to review it, and while each of the 20 needs a licence, 80 licences are still gone.

Going from E3 to E7 is a 154% price increase, but stops to hold revenue flat in case of around 50% headcount reduction. So the real question is not whether Office is safe or dead, but whether the price per remaining seat plus agent consumption grows faster than seat count falls.

What Copilot is worth if it works

Microsoft now has over 30m paid Copilot seats against c. 450m Office licenses - a 6.7% attach rate, up from 4.4% one quarter earlier. Every incremental percent is worth roughly USD 1.6bn of annual revenue at list.

At 25% attach rate, Copilot alone would add c. USD 41bn of revenue and c. USD 20bn of operating income - roughly 13% of current group operating profit. At 50%, it approximately doubles the Office franchise’s profitability.

And the growth accelerated through the most recent quarter. Which comes back to the point I made earlier in the post: Microsoft is very cheap relative to what it is attached to.

Adding Copilot to an USD 80k employee costs 0.5% of that employee’s cost. It needs to deliver a 0.5% productivity gain - roughly one hour per month - to pay for itself. That is an extremely low bar, which explain why Microsoft has pricing power.

Google

I believe that the widely repeated claim that Google gives Gemini away free is wrong.

In January 2025 Google eliminated its c. USD 20 Gemini add-on, and included it into every Workspace tier, consequently raising base prices by roughly USD 2 per seat - a 16-22% increase, without any opt-out. Business Standard went from USD 12 to USD 14.

But the right comparison is the blended, not list price one:

The two companies are now collecting exactly the same amount of incremental AI revenue per seat. Google’s rose prices for everyone by a little - and it did so by a little since most of them do not (yet) use the product. Microsoft, on the other hand, is concentrated in the minority who chose it and presumably use it.

Google sustains it due to not everyone using it - as soon as the usage picks up, Google will need to start charging more, hence why the headline USD 2 per seat is fake. But, admitedly, Google other key advantage is that it designs its own chips, and is thus the only fully integrated company in the industry.

And when we are at Google - Google’s search advertising business is not obviously safer from LLMs than Microsoft’s Office franchise is. That was the consensus worry when Alphabet was trading at depressed valuation in 2025. The stock has since recovered and the worry dissapeared, but nothing much has actually really changed - we will only know in several years. And the extreme AI scenario is far worse for Google than for Microsoft: in a world where agents do the work and humans stop browsing, search advertising has no obvious business model, whereas a governance layer still collects a fee while the agents work.

Part 3 - Azure and the margin question

The numbers

Azure grew 43%, accelerating from 40% in the March quarter, and full-year Azure revenue passed USD 100bn for the first time, up 41%. Microsoft Cloud gross margin was 65%, better than the c. 64% guided, and is guided to be roughly stable next quarter.

See below the evolution of margins:

In the latest quarter, both cloud margin series stopped falling and increased QoQ, while revenue growth also accelerated.

Is a falling gross margin bad?

Only bad if it reflects pricing pressure. It is fine if it reflects mix shift into a lower-margin but much larger business. Right now, the second is the case for Microsoft - management has said demand exceeds supply for seven consecutive quarters. You cannot be supply-constrained and price-pressured at the same time.

Why it is falling

Mix. Three sub-units with very different economics sit inside one business unit:

Classic Azure is still roughly 70% of the revenue, and it is a good business growing in the mid-twenties %. But growing the AI layer, which has lower margins, the fastest reduces the total margin down, even though classic Azure’s own margin continues rising with scale.

The depreciation debate

Capital expenditure does not hit the income statement when spent, but only once the datacenters become operational. Side note: for hyperscalers, majority of depreciation is already included within the gross margin. Two depreciation discussions all around the internet at the moment:

• The lag: Current margins reflect capex from 2024-25, not the c. USD 190bn of underlying calendar-2026 spend.

• Vintages stack: At roughly USD 190bn of annual capex, split two-thirds short-lived (chips, servers, storage) and one-third long-lived (shells, land, power), one year carries c. USD 24bn of annual depreciation. Holding capex flat they add up quickly:

Even if Microsoft stopped capex tomorrow, reported depreciation would continue to climb in the future years, as the facilities currently under construction would come online.

But what is sometimes skipped is the fact that the same lag applies to revenue. A datacenter under construction contributes neither depreciation nor revenue. The USD 24bn of annual depreciation from the 2026 vintage arrives alongside the revenue that vintage was built to serve - and Microsoft is building it because customers have already contracted for the capacity; well, at least in part. Backlog now stands at USD 678bn, up 84%, with roughly 30% recognised within twelve months. So the depreciation issue is not arriving without offset; but indeed the question of how high the revenues will be remains.

Economics of a datacenter

Below are high level unit economics on a USD 1bn facility:

Key takeaways:

• Accounting breakeven: revenue would need to fall to c. USD 192m - a 52% decline - for the facility to make zero operating profit. That, at the moment, is a rather wide margin of safety.

• Cash breakeven is even lower, because once the money is spent, depreciation is a non-cash charge on a sunk cost. Any revenue above power and operating costs contributes cash. This is the point most bearish commentary misses: for an investor buying today, capacity already built is close to irrelevant even in a scenario where it never earns its cost of capital. The money is gone, the depreciation is non-cash, and it even shields tax. The loss would be real for whoever owned the shares when it was spent, not for whoever buys now - unless, of course, they are paying for its overstated future revenues. The real risk would only be a decision to keep spending USD 190bn a year continously going forward, into demand that does not materialise - and management can reverse such a decision, if unit economics start deteriorating.

Of course, for the calculation, as with any infra asset, it’s the last years’ - which are also the least predictable - that actually make the return. First 3.8 years are needed for the payback / break-even, while the “profit” is then only made on the last 2.2 years. If you get squeezed on the last 2 years, or your asset stop working, you don’t make any money, even if the first 4 years went according to plan. And while the first c 3 years are de-facto already contracted via the backlog, the last few years indeed remain at full “merchant” risk. More on that in the next chapter.

Key risks to this

Useful life. Microsoft’s currently depreciates computer equipment at 2-6 years (which are two thirds of total datacenter cost). But each year removed has a material depreciation impact (per each annual vintage):

This it repeats for every vintage. Michael Burry estimated USD 176bn of understated hyperscaler depreciation across 2026-28.

But, in my view, the more relevant question if the potential chip margin reversion. Microsoft is buying at the top of a supply cycle, while Nvidia is running gross margins in the low seventies and memory is also in shortage.

If we assume the compute supply chain normalises within three to five years, as supply chains do, this would likely bring Nvidia’s gross margins toward 40%. As a result, the same chips would cost roughly 55% less. Even excluding any additional losses due to lower performance of older chips. Microsoft would then be carrying c. USD 110bn per vintage of chip assets whose replacement cost had halved.

That matters because cloud pricing (in theory) should follow the marginal cost of new capacity, not the historic cost of installed capacity. A competitor building in 2030 at half the chip cost can price below Microsoft’s fully-loaded cost and still make money. Microsoft’s revenue per unit of compute would fall toward the new cost base while its depreciation would stay locked at the inflated historic cost (or - a write down).

Altogether this would mean c. USD 60bn of embedded overpay per vintage, which is c. USD 10bn a year of depreciation. That is, in my view, the capex bear case getting too little attention - not that the demand is fake, but that the assets are being bought at prices that will not persist, and that cloud pricing eventually reflects replacement cost.

Finally, one of the key reasons TSMC won the chip wars was that it was the only pure-play fab company, thus did not compete with it’s customers directly. From the customers’ perspective, there was neither the risk that TSMC would still their IP, nor that TSMC would prioritise it’s own capacity needs first. I see a non-zero chance that the same happens for datacenters - afterall, Microsoft surely already is prioritizing it’s own facilities for its own needs, then come OpenAI’s needs, and only whatever is left can go to thrid-party customers / clients. If a large independent competitor / neocloud (esp. once capex prices fall off) is to arrive, the industry might see a similar shift to such an independent provider. Microsoft could potentially be stuck with an overbuilt - however, due to overall short lifetime of datacenters (6y for chips vs 2y construction period for a new facility), the risk is somewhat mitigated.

Part 4 - Copilot, models, and who keeps the margin

What Copilot actually is

The key Copilot branded products:

• Microsoft 365 Copilot (USD 30/user/month) - the paid assistant inside the Office applications.

• Copilot Cowork (since June 2026) - asynchronous agentic work; delegate a multi-step task and it executes across M365.

• Autopilots (introduced this quarter) - autonomous, long-running agents with full enterprise compliance, including an always-on personal agent.

• Agent 365 (USD 15/user/month) - not an agent, but the control plane: identity, logging and conditional access for agents, including third-party ones

• GitHub Copilot - coding

Microsoft has said it will consolidate chat, Cowork, Autopilots and Code into a single “super app” spanning consumer and commercial this quarter.

The adoption

Copilot now has over 30m paid seats, up from just over 20m in April and 15m in January.

Compared to 450m licenses, that is a 6.7% attach rate, while a surveys show that if enterprise users could choose freely, roughly 70% would make ChatGPT their primary tool, 18% Gemini and 8% Copilot.

To this end, Copilot’s growth is still driven substantially by procurement rather than preference - afterall, it is offered by a vendor companies already trust. That is the Microsoft’s moat.

However, this comparison still focuses on the wrong thing. Standalone assistants are still being judged on single-task quality. But Copilot’s proposition is integration: it knows the user’s calendar, mailbox, files, org chart and permissions without being told. While a user comparing Claude and Copilot on a discrete drafting task is comparing model quality, where Claude wins, a user asking “summarise where the XYZ deal stands” is asking a question a standalone tool cannot answer. It lacks the access - and in most large enterprises a new vedor will not easily be granted such access.

Microsoft’s own models

OpenAI, licence runs to 2032 but is non-exclusive, and Microsoft retains c. 27% ownership stake. But more importantly, MAI, the in-house family, if growing. Microsoft has announced multiple models across image, voice, transcription, coding and security, including its first reasoning model. Their edge is all about the cost savings, not the capability per-say.

The actual Copilot bull thesis

The market currently treats model capability as a single-dimensional race with one winner. That is unlikely to persist. Software did not converge on one application for everything; it split into many thousands of specialised tools. Models are already showing the same pattern - separate models for reasoning, code, transcription, image, long-context retrieval, and increasingly for specific verticals.

As the specialisation continues, competing to own the single best model becomes strategically pointless, but routing becomes the scarce function - sending each request to the cheapest model that can adequately handle it. An employee who sends a formatting question to a frontier reasoning model has burned perhaps fifty times the necessary tokens. Multiply by a large workforce and the routing layer can easily become worth more than the marginal model quality.

And this is what a wrapper actually does, and what Copilot is positioned to be. It also explains the margin structure. The router captures the spread between what the customer pays per seat and what the cheapest adequate model costs to serve - and that spread widens as open-weight models improve, because the floor on serving cost falls while the seat price holds.

Nadella highlighted this quarter the that every model should be substitutable. 90% of tasks can then be handled by the cheap in-house model, and 10% escalated to the frontier, with resulting cost halving for the same output.

This is why Microsoft’s lack of a frontier model matters less than it appears. The bar is to be good enough on the 90% of undemanding tasks, but retain access to somebody’s frontier model for the rest - and be the router.

It is also why open-weight models are structurally good for Microsoft rather than threatening. Foundry offers OpenAI, Anthropic, Meta, Mistral, xAI, DeepSeek, Moonshot’s Kimi and MAI. GitHub made Kimi K2.7 Code generally available in the Copilot model in July 2026 - the first open-weight selectable model, hosted on Azure. If a large fraction of token volume routes to models Microsoft hosts on its own chips at its own power price with no per-token payment to a lab, Copilot’s cost of goods can fall quickly.

Microsoft is thus deliberately commoditising the layer it does not own and defending the layers it does.

Part 5 - GitHub as leading indicator

GitHub is roughly USD 1-2bn of revenue against a USD 3.6tn company. Its importance in valuation terms is zero. But it does highlight a potential thread of Microsoft’s product suite overall.

GitHub Copilot launched into a new category and owned it. It now has 50m users, with over 90% of the Fortune 500. But have a look at the preference data:

Microsoft sold seats cheaply to the existing customer base, while challengers sold expensive tools to people who chose them.

Implications beyond GitHub? Coding may be the leading indicator for other knowledge work: it is getting the AI tools first and its buyers are the most discriminating. GitHub’s pattern - where incumbent won the seats, but challengers won the actual work - is exactly what would break the M365 Copilot thesis if it repeats.

The counter is that developers are unrepresentative. A lawyer or accountant does not install their own tools and will use what appears on their computer. Such defence, while correct, rests on customers’ inability to choose, which is what regulators are trying to erode.

Another lesson is that , while GitHub switched to usage-based pricing thus June, GitHub Copilot revenue still accelerated over 60% quarter on quarter, and seat seat growth remained intact. This implies that the incumbent could still monetise its existing base, while losing the preference contest.

Part 6 - Antitrust

Microsoft’s advantage is that it can make its own agent, identity system and audit log the default across 450m seats. That is also close to the definition of self-preferencing by a gatekeeper.

The Digital Markets Act (DMA) imposes obligations on gatekeepers in advance, without requiring proof of harm. Two of its listed core platform service categories are cloud computing and virtual assistants; its central prohibitions are self-preferencing and refusing interoperability. This is already being investigated and acted upon by regulators from various jurisdictions.

To this end, Microsoft’s Copilot auto-install into enterprise Office deployments in mid-2026 exempted the entire EEA. And while fines are noise, remedies could be impactful. What could matter is a requirement that Agent 365 treat third-party control planes on equal terms, or that Copilot is actually offered at an independent price. That would impact the terminal value / multiple, not near-term estimates.

On the positive side, heavy regulation raises barriers for everyone. Compliance costs are fixed costs, and a DMA-regulated agent market is one where a twenty-person startup cannot sell to a European bank at all.

Part 7 - Valuation

Method: Eight units, forecast five years to FY31, converted to net income at a 20% tax rate with a terminal price/earnings multiple applied and discounted back at a 10% cost of equity. Unit-level splits are estimates; Microsoft does not disclose them.

One note on reconciliation: the unit build gives c. USD 122bn of net income for FY26 vs USD 134bn reported, because reported net income includes USD 10.7bn of other income - largely the OpenAI and Anthropic gains.

I split Copilot into seats and consumption, because they behave differently: seats scale with headcount, consumption scales with work done. Agent 365 is also separate. However, it shall be noted that such purchases are correlated, because Agent 365 requires E5 as a prerequisite.

Revenue and operating margin

Net income by unit, after tax

Output

From the first principles, at a 4% equity risk premium over a c. 4.7% risk-free rate with a 75% payout, the justified terminal multiple is c. 14x for a business growing 4% in perpetuity. This implicitly assumes that Microsoft still has some growth left (beyond) inflation in 2031 - reasonable due to it’s implied market position under the base case scenario. However, 17x, which I actually assume, adds a small premium for what is not included in the forecast: Microsoft has built roughly one new USD 20bn+ franchise every four to five years - Azure, Teams, security, now Copilot - each monetised through the same distribution. You cannot forecast a product that does not exist, but you can pay for a demonstrated ability to create them. The best case holds (pre-earnings) 23x steady, which requires that Microsoft still looks like a fast-growing company in 2031; on those revenue numbers it would.

Copilot consumption is projected between USD 1.1bn to USD 50bn of net income across the cases - the widest spread of any business line. But this the only revenue stream that scales with work done rather than headcount.

What price makes investment worthwhile

USD 351 is where the base case delivers 10% a year, and it is the level I would have wanted to pay. Below that you are buying at a discount to a central scenario rather than a premium to it.

Key Risks

• Copilot follows GitHub Copilot’s pattern. Renewals could start disappointing in FY28 as the first three-year cohorts come up.

• Chip prices normalise and cloud pricing follows replacement cost. Assets bought at the top of the supply cycle carry depreciation a later entrant does not, while pricing, and in turn business-line’s revenue resets to the new cost base.

• Useful lives shorten. A move from six years to four adds over USD 10bn of annual depreciation per vintage.

• Agents go around Microsoft. Open protocols lets rivals reach enterprise data under without Microsoft.

• Office suite gets threatened. While no longer the focus the business product, the Office suite is still what sticks a lot of moat together.

Conclusion - I missed the window

The model above says USD 351 is where Microsoft brings 10% a year in the base case. Microsoft traded in that range repeatedly over the past month, but I did not buy it. This is because I started seriously looking at the company too late, and then took too long to process it. My preliminary analysis was not - I was eyeing it at c USD 350 price target as per my July 28th post, but was not comfortable enough just yet.

But now, at USD 488 the base case returns 3% a year. That is not a short - but, considering still plenty of unknowns - is not a buy either. Microsoft is again trading at “Mag7 multiples”. In any case, with the “savings” I bought more Reddit in Friday, so not all is terrible. Maybe Microsoft corrects again, and then, like with my Reddit piece, the price will once again drop into my target range. We shall see.

Nothing here is investment advice. No position. Figures are from Microsoft’s FY26 Q4 results and earnings call of 29 July 2026, company filings and product documentation, with market share and competitor data from third-party estimates and peer disclosures where noted. Unit-level revenue and margin splits are the author’s estimates; Microsoft does not disclose them.

To start, I was off with the logged-in US DAUq growth, and indeed the lack of US DAUq growth is not great news. The problem is not even so much in the results, but in the earnings call and the management’s communication. Frankly, it is disturbing, as this is a recurring issue - it has become a tradition for the earnings call Q&A session to do more harm than good. The killer was the Huffman’s statement that “search referrals were choppy in the quarter.” Choppy? Is there really no better, more confident way to address this issues?

I do not want to be insulting, but the book about Reddit’s early days is literally called We are the Nerds - these guys are not the extrover, well spoken type. They need to hire a competent IR ASAP, as each earnings call the poor communication from the management seems to result in wild and overblown swings in the stock price, despite the overall fantastic business performance.

As per outlined in previous articles, the issue with DAUq is that it does not adjust for the time spent on site. For the existing users - like me - the app if extremely sticky. And despite me counting as 1 DAUq, I am a DAUq that spends - on average - 1h on the site every day. This is not comparable to a google referral user that uses Reddit 1x every week for 2min, counting as 0.14 DAUq. 7 such users indeed count as 1 full DAUq - so same as me - but they still only spend 2min on the site each day, on average. I spend 1h. The metric, even stripping away logged in and logged out is completely flawed. It’s like Daimler/Mercedes reporting amount of customers visiting their dealerships - nice but it doesn’t really tell you much.

Let’s play the devils’ advocate. Let’s assume no new users ever come - only the existing DAUqs remain in place. So let us run the worst case - no further DAU growth neither in US nor internationally. In this case, you only keep the ARPU growth - both via ad load and via price per ad shown / click increase. Let us then assume Reddit continues to grow only via ARPU expansion going forward, and that ARPU only doubles from here-on - a low hanging fruit given where we are with ads at the moment and given the current 36% YoY APRU growth (at this rate, it would take just a little over 2 years to double the ARPU). Where do you end up regaring Reddit’s valuation by extrapolating Q2’26 results in this scenario? You end up at USD 6.4bn in revenue and USD 2.6bn in net income (let’s further conservatively call it USD 2.1bn as NOL is set to be fully exhausted sometime next year, meaning taxes will go up). There is USD 2.8bn of cash. So at USD 26bn market cap, or USD 23b net of cash. This meanas Reddit is currently trading at c 11x run-rate net income (= cash-flow) under the nuclear case scenario.

To put “choppy” Google referrals and resulting DAUq issue into perspective:

• Meta, Q4 2017: decline in US & Canada DAU

• Meta, Feb 2022: first-ever global DAU decline

• Netflix, Q1 2022: lost 200k subscribers

• Apple, FY2016: iPhone units fell c 20m

All of the above companies have been through some chop. Chop is safe. Chop is normal. What matters is the strength of the core product - and the stickiness of Reddit (and the network effect - tho this is more applicable for non-nuclear cases).

As such, the market reaction is absolutely overblown. Reddit, growing at 60% YOY, is now trading at 32x TTM PE (and 20x forward PE!). Let us take Benjamin Graham valuation formula for growth stocks:

Fair value = TTM EPS x (8.5 + 2g)
whereas g is a reasonably expected 7 to 10-year annual growth rate

So what does g have to be for Reddit to be Fair value at the current USD 138 per share? 12% p.a. So from 60% growth in Q2 2026, the 7-10 year average growth rate for Reddit EPS must come to 12% for the stock to be priced fairly at the moment. If Reddit just grows ARPU (with no DAU growth) at 12% for the next 7 years, it’s ARPU will rougly double in 7 years = the nuclear case described above (which would actually happen in just over 2 years with the current ARPU growth rate). So Reddit currently really is starting to get priced for the nuclear case, assuming NO more DAUq growth and NO licensing deals re-negotiations. Nuts. I’ve added to my position.

I believe social media companies are among the easiest stocks to disagree with Wall Street on - because you use the product. Better yet - you are actually the product; anyway, you see the developments in real time - and that is something the historical numbers don’t show.

Disclosure: I am long Reddit, and I am considering adding into the earnings (details at the end). Nothing here is investment advice.

First, a story from way back

Let me take you back to late 2010s - an age ago in social media terms. I was interning at one of the larger media agencies, and, as is appropriate for an intern, was handed the task no vetted employee wanted: the entire digital media advertising budget of the agency’s largest client. That is how seriously digital ads were taken back then.

Meanwhile, I watched my senior colleagues allocate the TV budget. “Yeah, I’ll put one here at 10:30 on Sunday to get some more exposure” - proceeding to pick the most expensive slot available. No historical data, no measurement, nothing - pure vibes. They should try trading. My “stupid intern task”, meanwhile, tracked CPC and CPM to two decimals. Seeing both side by side, it was obvious who would win.

Fast forward to late 2018. While browsing Instagram, and being already generally bullish on digital ads and Meta (back then Facebook), I start noticing a very significant uptick in ad load. At some point it hits me: if ad load has increased by this much, it must show up in the next report. But am I the only one seeing this? I check with a few friends across different countries - all confirm seeing a lot more ads recently. Bingo. There is no real news of the ad load increase anywhere online, nobody is posting about it, and analyst consensus - I guess - isn’t taking it into account. I do some research and calculate the implied impact: an extra c USD 500m in quarterly net income. I was already bullish on Meta, and this extra USD 500m - not priced in - represented an almost 10% jump in quarterly net income. Significant.

So I make a post on r/wallstreetbets – which back then it was the only sub with a meaningful audience for discussing stocks on Reddit. Here’s the full post, with excerpt below:

Incidentally, everybody was freaking out at the time about Facebook “losing users”, and how the whole company would go bust tomorrow because of it. Reminds you a bit of Reddit (logged-in) DAUq situation today?

Aftermath: against analyst expectations of USD 6.28 billion in Q4 2018 net income, the actual number came in USD 600m higher, at USD 6.88 billion. David Wehner, then CFO, on the Q4 2018 earnings call:

In Q4, the average price per ad decreased 2% and the number of ad impressions served on our services increased 34%. Impression growth was primarily driven by ads on Instagram, including both feed and Stories, as well as Facebook mobile News Feed.

The stock shot up 11% the following day, attributable to earnings beat from Instagram side - and that was back when such moves were not yet an everyday occurrence.

Coincidence? I don’t think so. To an observant Instagram user, the coming earnings surprise was clear - it’s just that Wall Street didn’t use the app, so didn’t see it. And the exact same dynamic is, I believe, playing out for Reddit right now.

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Where we are with Reddit today

Logged-in US DAUq

Stagnating logged-in US DAUq has been one of the street’s main worries in recent months, and one of the main reasons behind some of the steep price drops, despite otherwise stellar earnings.

I covered the logged-in vs logged-out DAUq topic extensively in a dedicated post here: The Stagnation of Reddit’s US Logged-in DAUs: Signal or Noise?

The most relevant extract is the following quote from Reddit’s Q4 2024 earnings call:

If you’re coming from search, we actually used to be more aggressive... we’d say ‘Hi, download the app, log in.’ That is a classic case of it works in the short term, it moves the numbers and it doesn’t work in the long term. It annoys people... We’re trying to make our customers happy. What are they there for? Answers - give them answers... They’re not looking to join a community in the moment.

So Reddit deliberately never pushed for app downloads or log-ins, optimizing instead for organic traffic growth. It is a simple trade-off: forcing downloads or log-in too aggressively risks alienating (non-frequent) users from coming back for their answers over the medium to long term. All the while, management has kept reiterating on recent calls that, thanks to improved predictive targeting, logged-out users are now monetized at a similar level to logged-in ones - making the distinction increasingly arbitrary. Frankly, it was always a somewhat pointless split; plenty of other cuts would be more informative. Splitting DAUs by amount of visits, for instance: users visiting an app 10 times per day for 15min per-session vs user visiting 1x per week spending 5min clearly have vastly different monetization potential - likely a bigger differentiator than the log-in status.

But what has changed now? In the Q4 2025 shareholder letter, management announced it would phase out the logged-in vs logged-out reporting, with Q2 2026 the last quarter for the split. The market freaked out - stagnating US logged-in DAUq plus discontinuing the metric read, to many, like hiding a problem. Again, I already covered this in my previous piece, so will not delve into the topic here - but it’s not a problem.

Now, ask yourself: if you are a rational Reddit manager, what would you do for this final reporting quarter? I know what I would do - I would temporarily turn the log-in/download prompts back on, showing logged-in DAUq growth in the metric’s final quarter and calming the market on its biggest worry. This metric is trivially easy for management to “play with”. You want more logged-in DAUq? Prompt users to download the app and log in. Logged-out DAUq takes a small hit, but logged-in reliably increases. And since the split will no longer be reported afterwards, they can revert to normal from Q3 onwards - if they want to. It is the lowest-hanging fruit imaginable: one quarter of prompting will not alienate many users, and if nothing else it provides a valuable experiment on long term user retention.

And indeed - right at the beginning of Q2, miraculously, Reddit users started reporting pop-ups pushing the app install and / or log-in when visiting Reddit outside the mobile app (or even within the app). Right after, Reddit’s app store ranking spiked. A few example posts:

• r/help: Reddit app forcing me to login

• r/help: Reddit is a website, why is it forcing me to the app?

I tested this myself - opening Reddit in an incognito browser tab indeed threw up a log-in prompt, and even now, if using a VPN, I can no longer access the Reddit website without logging in. This should naturally increase app downloads and, in turn, logged-in user growth. The effect immediately in the iOS App Store download rankings: Reddit jumped from position #162 to #78 in the US during late April, with similar moves in the UK (#180 to #85) and Germany (#194 to #144).

Looking at the US, which is the core focus of the market, Reddit consistently ranked in the 150-200 range on iOS throughout February - early April, then suddenly spiked by c 100 places into late April:

While the position has since partially retraced, it remains around rank #100 on average - still significantly above the pre-April #150–200 baseline.

Mind you, we don’t need a major increase in US logged-in DAUq. The market expects the number to remain flat, so essentially any tangible growth is a positive surprise.

Back-of-the-envelope: using a power-law distribution of app downloads by rank, moving from c #170 to c #100 in the US App Store implies roughly 10k incremental daily downloads - call it c 1mio incremental iOS downloads over the quarter, or c 1.5mio including Android. These downloaders are higher-intent (they were actively prompted mid-task), so let’s assume 75% of them log in.

But, importantly, new logged-in account is not a new logged-in DAUq. DAUq is a daily average, and most users do not visit daily. We need to estimate also the “compression ratio” between weekly active uniques (WAUq) and their daily-average contribution (into DAUq). In the US in Q1, DAUq was 53.5m against WAUq of 196.5m, a ratio of c 0.27. In other words, the average US active (weekly) unique shows up on fewer than 2 of 7 days, and each incremental active user adds only c 0.27 of a DAUq, not one.

And for the users a log-in prompt actually catches, even 0.27 is likely generous. The number is an average that includes the heavy users, which mostly have accounts already; a lot of the marginal converts would be in the lower-frequency tail - the twice-a-month Google drop-ins - whose personal compression sits below the blended average. Let us then assume that the applicable ratio would be c 0.10-0.25.

So: c 1.1mio converts times a c 0.10-0.25 compression ratio gives roughly 110k-275k of incremental logged-in US DAUq from the app-download channel alone. This would be further aided by the web and mobile purely log-in prompts - which convert existing logged-out visitors with no app download - and the total should be comfortably in the low-hundreds-of-thousands. That would take US logged-in DAUq from 23.2m in Q1 to somewhere around 23.3-23.5m in Q2. And that does not include the people who would convert either way (the “organic” converts) - though those were indeed at net zero over the recent quarters.

The precise figure does not matter, and I want to be clear I am not claiming a large logged-in beat - by nature, these are low-weight users, so the effect is modest. What matters is the sign. The market expects the metric to come in flat, as it has been for four straight quarters. Every version of this calculation, however conservative the compression ratio assumption, produces a positive number. Against a market expectation of zero, modestly positive is the whole surprise.

I believe this should calm the market on one of its main worries about the stock – a fitting send-off for the metric’s final reporting quarter.

Analyst consensus

Another topic I’ve covered extensively in previous posts: analyst consensus for Reddit is not very meaningful, and consistently undershoots. The mechanism is simple - consensus anchors to management’s own quarterly outlook, which is itself always conservative. Both have somewhat shot themselves in the foot: management has “prudently” under-guided so consistently that the market now expects the beat, and if Reddit merely hits its guidance, the stock will probably tank.

See below - for the past two years, consensus has followed management’s forward guidance closely, recently ending up only 1-2% above it on revenue. The actuals, meanwhile, have consistently landed c 10%+ above management guidance.

Similar on the EPS side:

My estimate

Now, actually estimating current-quarter revenue from hard data is essentially impossible, at least for a retail investor - Similarweb and Semrush traffic data shows no reliable pattern against past quarters, and due to the on-going rapid Google Search algorithm change,s they are producing more and more noise each month. What you can do, as a user, is observe the platform itself. Throughout Q2, I continued to see major improvements in both ad quality and advertiser quality - to the point where, for the first time, I actually stopped and clicked on a few ads (no purchase yet, though). The ads finally became, in my view, “decent” during Q2. Far from Instagram level, but at least catching my attention. To this end, there is no observant-user-platform reason to expect a slowdown.

So instead of estimating revenue bottom-up, we can frame Q2 through Reddit’s historical outperformance versus its own guidance. Sounds a bit voodou, I know, but that’s all we have to really work with. Listen up.

Management guided Q2 2026 revenue at USD 715-725m (I use the USD 720m midpoint). Unlike revenue, historically, the costs guidance has been broadly accurate, so I take the guided c USD 430m of costs and scale them up with implied 20% incremental opex for any dollar of revenue beat (roughly in line with recent opex over-runs on revenue beats). I take SBC as per management guidance - up 23% YoY due to the new award program kicking in during Q2 (gg Jen). Notably, that is a c USD 40m step-up from Q1, which will be a significant drag on sequential EPS and incremental net income margin for the quarter. From there, three cases:

• Worst case: revenue exactly at management guidance midpoint (USD 720m, +44% YoY) - i.e. the first zero-beat quarter in the company’s reported history. 1% increase in diluted share count QoQ is assumed due to new grants kicking in in Q2;

  • To clarify, as per the previously outlined own experience while using Reddit during Q2, I see no reason how actuals could come up below management guidance, hence this is a solid Worst Case

• Lower Bound case: an 8% beat versus guidance (USD 778m, +56% YoY) - in line with the lowest historical beats (Q1’25 and Q3’25). Same 1% diluted share count increase as per Worst case;

• Upper Bound case: a 15% beat (USD 828m, +66% YoY) - matching, but still below, the largest beats of 16% and 19% in Q3’24 and Q2’25, respectively. No QoQ increase in diluted share count assumed - i.e. buybacks to fully offset the increase

Even the Lower Bound Case, note, requires nothing heroic - just Reddit doing what it has done, at minimum, in every single quarter since listing. And that case would deliver Revenue of USD 778m, with an EPS of 1.15.

Market expectations

Since the market already prices in a beat versus management guidance, the more useful question is how my Lower Bound and Upper Bound cases sit against market expectations rather than company guidance. The best publicly available source here is Estimize, which has Q2’26 revenue at USD 760m and EPS at USD 1.13. On that benchmark, even my Lower Bound case lands slightly above on both metrics. The caveat is significant, though: Estimize’s Reddit forecast is based on fewer than 15 contributions, so I would not lean on it heavily. Earnings Whispers, by contrast, has EPS at USD 1.26 - which under my model would require c 12% topline outperformance versus guidance. Essentially, precisely estimating what the market truly is expecting is not possible.

For a name like Reddit, though, three things drive the reaction: revenue, (logged-in US) DAUq growth and forward guidance. On revenue, the (admittedly weak) Estimize benchmark suggests we are covered. On DAUq there is no consensus to benchmark against at all - analysts do not even forecast it - but for the reasons set out above, I expect a positive surprise. And finally, I believe guidance for the next quarter should hold up, given the noticeable & continued product and ad improvements seen throughout Q2. None of this is quantitative or provable; it is a qualitative judgement call. But I think the odds sit clearly on the side of a beat.

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Conclusion

I believe this is setting up to be a great quarter for Reddit - primarily due to the coming US logged-in DAUq “surprise”, with the app download data already confirming the setup. Additionally, ads have legitimately gotten better again, and there is no reasonable basis for a negative revenue surprise: merely repeating the smallest historical beat lands revenue around USD 778m, which seems in line and even slightly above the market’s expectation. The problem with revenue is two fold: it is hard to estimate it, and also hard to know what the market expectation is. So we revert to a simple user-experience check, which implies revenue & guidance should do just fine, while adding on top the DAUq surprise. Together, those, in my view, mean that beat is more likely than not, and when the odds are in your favour, you should bet.

To this end, I naturally remain long with my core position, and am also planning to add a smaller “earnings play” position into the release via RDTL (the GraniteShares 2x daily levered long RDDT ETF). To be clear on the latter: daily-levered single-stock ETFs are a short-term earnings-event instrument, not a holding - size accordingly.

Disclaimer: This is not investment advice. I hold positions in the securities discussed and my views are biased accordingly. My positions, and plans thereof are subject to change without notice. Do your own research.

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Two days ago, on July 22nd, the market handed us another live demonstration of all that is wrong with the market’s view of Reddit, which market continues to treat as a fragile, non-moated business that is just one misstep away from bankruptcy.

The WSJ reported that Reddit has internally discussed cutting off Google’s access to its content, as renewal talks over the data-licensing deal drag on and AI Overviews eat the referral traffic. The stock fell c 8%. Such swings and “scares” are not uncommon for Reddit - think back to Moltbook and Facebook Forums scares earlier this year; or the previous Google and OpenAI citation scares.

The core scare with regards to the “Google fight” is not due to actual licensing fee loss, but potential top-of-the funnel DAUq growth loss. But ask yourself: if you are a rational Reddit manager, what would you do for such licensing deal (re)negotiations? You know that USD 60m annually that you are currently getting was negotiated 2 years ago and, considering developments of LLMs since then, is way too low. You know that while you need Google for referral traffic, Google also needs you - or better, cannot afford being the only LLM cut-out of Reddit access. So you would negotiate tough, threatening to cut-off access if needed. Not that you really mean it - but it’s a negotiation tactic. Negotiations with a much stronger party are tough, as such parties try to simply force upon you their will, so you need to establish some boundaries and deliver a credible threat to be able to negotiate at all.

To this end, the market reaction is only coherent under a specific, and in my view, entirely wrong model of the world.

Simple World vs Real World. One of the more common flaws in human reasoning in my view is that we tend look at the world exactly as it is today, take one variable, change it, and hold everything else frozen. We then proceed to assess the impact of a change in said one variable on everything else - and by holding everything else constant. Call that the Simple World. It is also how most single-headline repricings are computed: Reddit loses Google traffic, so subtract the traffic, subtract the revenue, done. But the world is not a spreadsheet with one live cell. It is fluid and adaptive - every change provokes counter-changes, from the counterparty, from competitors, from regulators, from the company itself. That’s the Real World. Almost all of the stock drop following this announcement was - again - being priced in the Simple World.

So let’s do it properly. Let’s take the most nuclear scenario possible - far worse than what was actually reported - and run it through both worlds. Assume the Reddit-Google relationship blows up completely: the licensing deal is not renewed (peanuts to the bottom line anyway), and Google additionally de-ranks Reddit from organic search entirely (the real nuclear outcome).

The Simple World nuclear case:

• Reddit loses c 50% of its top-funnel Google traffic - logged-out DAUq halves overnight, resulting in 53m in total DAUqs lost

• Back-of-the envelope Q1 2026 numbers calculation: Reddit is taken back to just below break-even:

So even the frozen-world version of the apocalypse is not bankruptcy, as Reddit has USD 2.8bn in cash reserves and continues growing. It is Reddit at roughly break-even - with a P&L of Q3 2024, about two years back. Back then Reddit was running at USD 348m revenue and USD -14m net income. Now, let’s unfreeze the world.

The Real World:

Now in the Real World, where things are not static, the following (among other) would help counter-balance the nuclear case:

• The content survives, so the platform survives. The logged-out users Reddit would lose are not the ones producing content - they cannot even upvote. The corpus, the communities and the network effect are untouched, so Reddit keeps compounding, just at a slower clip. US and international user growth (7% and 26%) roughly halve, but global DAUq still grows at c 8% (down from 17%), and ARPU growth of 50%+ can continue regardless. In P&L terms we are set back about two years - not destroyed. Should the stock re-rate on that? Absolutely. Does it mean Reddit can never grow into its valuation or deliver a multi-bagger from here? Not at all.

• The 50% may already be shrinking. The log-in and app-download push discussed in my previous notes is, right now, converting logged-out users into logged-in app users who arrive directly. Every quarter that continues, the share of the business exposed to a Google cut-off gets smaller. By the time the current agreement actually expires, the real loss would be well below 50% - if Reddit continues with such prompts, that is. And if they see Google cut-off as a real threat, they will.

• De-ranking means a lawsuit. If Google retaliated by burying Reddit in organic results, that is a clear cut antitrust case - a few years of litigation, a large settlement, and the ranking restored. And the regulatory setup is already being paved: in June 2026 the UK’s CMA imposed a conduct requirement on Google, forcing it to let publishers opt out of AI Overviews and model training while keeping their position in ordinary search. Short term pain remains, but medium to long term the issue will be resolved via regulation.

• Reddit is not fighting alone. The same WSJ piece names USA Today, Politico, The Economist, People Inc. and Reuters as reassessing their Google relationships. The traffic damage behind that is not small - USA Today’s US organic search traffic down close to 50% year on year, Politico down 23%, CNN c 25%, Business Insider more than 85%. This is not Reddit’s sole fight - it’s a common fight of all the content producers, which should be gaining traction and members over time. In numbers, there is power.

• And moats do fall. One could argue Search, Gemini and AI Overviews would be fine without Reddit. Perhaps. Anthropic atm is doing just fine without (fresh) Reddit data. But would they be fine without Reddit and USA Today and Politico and The Economist and Reuters, with more joining? A search and / or AI product without the major sources of information degrades, and competitors offering a better experience do not sit idle. Anyone who considers Google losing its search position an impossibility should recall the Internet Explorer vs Chrome battle: stifle the innovation and the use case of your product long enough, and you get replaced no matter how moated you looked.

• The capex story cuts against Google. Google’s entire justification for its enormous AI capex - which the market is still somewhat stomaching, thought barely - is that it will lead in AI. If Reddit and the major publishers cut Gemini off, while OpenAI and Anthropic get / keep their licensed access, what exactly is USD 40bn a quarter of hardware buying you against a data handicap? At some point the obvious trade suggests itself: USD 30bn of hardware and a few billion in annual opex produces the better model. Google is not a passive object in this scenario - it has every incentive to pay.

Which brings us back to the underlying point from my original Reddit deep dive. LLMs scraping the entire web forever, without compensating the sites that previously monetized that traffic, is not a stable state. It’s a naive output of the Simple World thinking. If nobody is paid to produce content, eventually nobody produces it; if nobody produces it, AI Overviews become useless; and if AI Overviews become useless, Google loses too.

It is hard to predict exactly where this settles - but very easy to predict where it cannot settle: Google paying next to nothing while its sources keep supplying the information that makes its product work. That combination is not a stable state, hence is an impossibility. A market discovery period is upon us, in search for the new stable state of power dynamics between the content producers and content distributors - and the road will be bumpy, and there will be fights - but rest assured the impossibility scenario is, in fact, an impossibility. Looking at the world this way, while the path forward remains blurry, the end destination in 5-10 years time is not that blurry at all. The bumpy road is here, but one thing is clear: we know where we can’t end up.

And Reddit is generally well positioned on that road - it is one of the very few platforms already being paid for exactly this, now renegotiating in a materially better power environment than the one in which the original deal was signed. It is also one of a kind - while Google can easily drop Financial Times, but keep access to the Economist to get very similar data, there is de-facto no real replacement Google has for Reddit. And in this sense, Reddit should be better positioned compared to major news outlets.

So: the Simple World nuclear case sets Reddit back roughly two years. The Real World nuclear case is considerably better than that. Between that floor Simple World outcome and the current trajectory sits an effectively infinite range of outcomes - and the market seems to be pricing only the floor of a scenario that has not happened, in a negotiation whose entire purpose is to make sure it does not.

For Q1 2026, Reddit reported 1.01 USD in earnings per share (EPS), which is 61% above analysts’ consensus of 0.62 USD/share, and - even more importantly - is 3% higher than even analyst consensus EPS for Q1 2027, which still stands at 0.98 USD (!). Think about this - Wall Street so fundamentally does not understand Reddit, that its forecast was beaten so hard even their projections for 1 year out on a 60% topline growth business are still lower than the actual numbers already achieved in Q1 2026 - a quarter with no one-offs distorting the numbers. See the chart below for just how consistently Reddit has been obliterating the forecasts, including the comparison of Q1 2026A vs Q1 2027 forecast EPS.

As per above, even with recent revisions, numbers beyond 2026 continue to be disconnected from the underlying reality of Reddit as a business. Reddit is a fabulous business - and it is by far the best business I know of. The platform is largely text based, providing for 91% gross margins. Beyond that, most of the labour is outsourced and provided for free to Reddit, as the moderators are a giant volunteer workforce. The new user acquisition is done “automatically” via a very strong network effect. All that is really needed from the corporate are some fine-tunings to the already existing platform and user experience, but most importantly improvements in monetisation & related continued staffing of ads teams. Finally, capex needs are essentially none - USD 1m in capex for Q1 2026. Thus, Reddit is well positioned to become one of the most profitable companies in the world, with most of the heavy lifting being done by free labour and the network effect. And this is where I believe Wall Street is completely off on Reddit - beyond the also relatively conservative revenue growth projections, see below the development of the net income margin (analyst consensus forecasted numbers are shown for 26-28):

Essentially, analysts are forecasting Reddit’s net income margin, which stood at 35% and 31% in Q4’25 and Q1’26 respectively, to fully stagnate going forward. However, 2025 was the first profitable year for Reddit, meaning only in 2025 did the headline revenues surpass the overhead needed to sustain the website. However, for continued growth in revenues, only minor incremental opex is needed - the fixed costs are already covered with revenues by now. This can also be seen in historical numbers, see below incremental (i.e. current period, less same period 12m ago) revenue and net income development — and importantly, the incremental net income margin.

Incremental net income margin, on the back of the flywheel effect, as of Q1 2026 stood at 65.7%, up from 45.5% in Q2’25. Even assuming this will compress over time, as CIT DTA will expire, adjusting for that we would get to c. 50% incremental net income margins (65.7% margin x (1 – 24% CIT)). This means that net income margin can be expected to continue trending upwards from the current 30% baseline -something completely not captured in analysts’ forecasts, which essentially estimate incremental income margin to start rapidly decreasing down to 35.8% by 2028. Why? The platform is built, the current opex structure calls for 65% pre-tax incremental margins, so a decrease to 35.8% assumes a material decrease in Reddit’s profitability as it scales - an assumption that fundamentally does not make any sense.

Further to the underlying ads business performance - which is the core of the long-term investment thesis, as per outlined in my previous deep dives and my post from 2 weeks ago, there are a number of short to medium term catalysts on the horizon:

• The Anthropic lawsuit is so far going heavily in Reddit’s favor. The California district court found that Anthropic was “exploiting Reddit’s platform without authorization and compensation to train and power its AI chatbot Claude, which enriched Anthropic by billions of dollars. These elements are qualitatively different from a copyright claim.” This distinction matters, as AI companies defending against content scraping lawsuits have consistently relied on fair use - a doctrine under US copyright law that, under certain conditions, allows using protected content without permission. While a strong shield, it only works as a defense to copyright claims. On the contrary, Reddit is suing over Anthropic breaking its Terms of Service. By ruling that Reddit’s claims are qualitatively different from copyright infringement, the court effectively removes Anthropic’s most powerful defense. You can’t fair use your way out of a contract breach. With Anthropic’s planned IPO on the horizon, a settlement seems like the most likely outcome - they likely won’t want a major lawsuit overhang while going public. Either way, a large one-off settlement plus a licensing agreement looks very probable. Importantly, at current valuations, and as per my deep dive, you are paying nothing for this upside - it’s a pure free option. At the same time, this might be a catalyst for the market’s view on licensing income to change - if Anthropic has to start paying USD X00m annually for licensing, this flows directly to the bottom line (tax is the only expense). This is essentially a 100% pre-tax margin, stable & with positive outlook revenue stream.

• The above also sets a strong precedent for the pending Perplexity lawsuit, as well as upcoming & already underway Google & OpenAI licensing deals re-negotiations, the existing contracts with both set to expire in Q1–Q2 2027

• With all S&P 500 inclusion criteria are still being met, hence index inclusion remains a short-to-medium term catalyst - which historically brings meaningful passive buying pressure

• Similar to Meta, Reddit should be one of the key beneficiaries of the AI boom, as improved AI can be used to further improve the monetisation of users / ad targeting under an expedited timeline and with minimal incremental costs. And while Meta’s platforms are already heavily optimised, meaning any incremental targeting improvement requires relatively heavier investment (see their surging capex commitments for compute), Reddit is still very early in the monetisation journey, hence should have a lot of low hanging fruit left to pick, before incremental improvements start becoming challenging. To this end, Reddit carries minimal AI downside (as capex is essentially zero), but large upside as the targeting should continue improving

• US DAUq stagnation scare might be coming to an end - users have been reporting pop-ups to install the app, if they visit Reddit outside the mobile app. This should naturally increase the app downloads and thus logged-in users growth. We can already start seeing the effect in iOS App Store downloads trackers - Reddit jumped from position #162 to #78 in the US over the past 2 weeks. Similar trend can be seen also in UK (from #180 to #85) and Germany (from #194 to #144).

To this end, it appears we are likely to see a “positive surprise” on logged-in DAUq user growth for Q2 2026 earnings - which will also be the last quarter in which Reddit will report this split (they announced starting Q3 this year the split between logged-in and logged-out users will no longer be reported). That’s a good strategy - ensure a positive development and surprise just before the end of reporting of a metric.

To summarise the actual headline numbers: Revenue of USD 663m, up 69% YoY from USD 392m, with net income of USD 204m (USD 1.01 diluted EPS) versus USD 26m (USD 0.13) a year ago. That’s a ~7.8x increase in net income in 1 year (growing linearly and predictably, i.e. without any one-offs or distortions anywhere), on a 31% net margin already in the 2nd year of profitability. Ad revenue alone grew 74% to USD 625m, the seventh straight quarter of >60% revenue growth, but the overall revenue growth continued to be “dragged down” by relatively low 15% growth in Other income (i.e. licencing fees), as the Google and OpenAI (and Anthropic) data deals are still being renegotiated. Operating cash flow hit USD 312m, a 47% margin and up 145% YoY. Q2 guidance from management (which has historically always been conservative) is USD 715-725m revenue, ahead of the USD 712m consensus, with adjusted EBITDA of USD 285-295m.

Worth flagging that Q1 is historically Reddit’s slowest seasonal quarter (whereas Q4, due to the holiday season, is always the top quarter in the ads business). So we are at a point where the “slow quarter” is now a 31%-net-margin business.

The valuation arc keeps bending. Assuming a market cap of USD 30bn, in just 1 year, Reddit’s trailing 12 months (“TTM”) PE ratio has dropped from 256x (!) to 42x. It seems on track to reach USD 1bn of earnings for full-year 2026, meaning you are getting into a 60+% growing business at a 30x forward PE. Not bad.

Whether 42x TTM or 30x forward is still rich for a 91%+ gross margin business compounding revenue at ~70% with a maturing data-licensing leg is up for you to decide - you know my view. But for some perspective, Costco is trading at 45x forward PE, and Apple is at 28x. Wtf? Anyway, the “Reddit is too expensive” critique is becoming harder and harder to defend at these price levels - and that’s true for the third consecutive quarter.

However, when it comes to ARPU convergence, things get even murkier. This is due to neither of the 2 companies reporting granular enough data for a meaningful comparison from directly reported numbers:

• Reddit only reports 2 regions: “United States” and “Rest of World” (all international users combined). They do not break down into Meta’s 4-region structure (US & Canada, Europe, APAC, ROW)

• Meta reports global DAU but does not publicly disclose DAU broken down by the 4 regions. They only report regional data for revenue metrics

Thus, in this analysis I tried to break down the financial statements to make them more comparable on a like-for-like basis. This required a number of assumptions, which I outline in the Appendix. Imporantly, I would note that a different methodology was used vs my original deep dive, so the final results are not fully aligned - but paint largely the same picture, meaning that the target price / valuation numbers from my original deep dive can be assumed to remain unchanged.

I would note however that the key item we are looking for here is the convergence pattern (yellow % line), so above is not a material issue anyway. Please see below the results:

Above charts show that Reddit is successfully converging to Meta’s ARPU across all regions, but most rapidly so internationally. In ROW, Reddit vs Meta ARPU increased from 4% in 2021 to 15% by 2025. Similarly, Europe and APAC exhibited strong growth, both increasing from 11% in 2021 to 35% by 2025. Finally, US ARPU convergence increased from 15% to 18% between 2021 and 2025.

The “bumps” in all charts are mostly due to Meta’s very strong continued ARPU climb between 2022-2024, whereas Reddit’s ARPU growth in those period - while also positive - was relatively weaker. Nevertheless, this trend was then reversed in 2025, when Reddit’s ARPU growth accelerated and started catching up with Meta’s again. To recall, my original deep dive and valuation methodology assumes no further ARPU growth for Meta from 2025 ownard - putting a conservative ceiling on the Reddit’s mature state ARPU numbers. In reality, both Meta’s and Reddit’s ARPU should continue to grow, so Reddit is posied to benefit 2-fold: from the overall Meta / digital ad ARPU increase, as well as from the pure APRU convergence side.

Overall, the resulting Reddit’s increase in regional ARPU to reach Meta’s levels based on this analysis would be 5x for US, 7x for ROW, and 3x for Europe and APAC.

Again, I would highlight – all that Reddit needs to do is replicate the business model that was already invented and perfected by Meta. Meta proved that online advertising is a very profitable business if you do it right. But they had to “invent” it from the ground up, in turn carrying relatively high execution risk. On the other hand, Reddit needs to “only” copy the Meta way. This can be done by poaching Meta engineers, methods etc. And companies do not need as much convincing anymore to spend part of their marketing budget on digital - Meta already did the groudwork here. To this end, I see Reddit’s execution risk as materially lower, and as the numbers above show, Reddit to date has successfully demonstrated it is indeed closing the ARPU gap with Meta. At this price (USD 140/share, c 27bn market cap), as per my previous posts, Reddit is trading at c 25x forward earnings. I thus continue to believe that Reddit is being priced too conservatively considering just how clear its growth path ahead – both in terms of ARPU and DAU growth – is and continue to add to my position.

Appendix: DAU and ARPU Calculation methodology

DAU splits for international users for both platforms were made using worldpopulationreview.com data for respective website visits in 2023 (and same % ratio was kept for other years). For Meta, I took the average between Instagram and Facebook as final % split

• US (US & Canada for Meta) numbers are based on actual reported by Reddit & for Meta they are based on historical reported Facebook only DAU numbers, assuming a 90% overlap between the 2 platfroms and 1% annual growth rate (since Meta stopped reporting FB only DAU starting 2024). Importantly, the resulting DAP for Meta thus comes out to c 230m for 2025, lower than estimate of 280m in my original deep dive

• I then calculate implied Meta ARPU per region, based on above numbers, and use the ratios of Meta’s ARPUs between those regions as an input for Reddit’s ARPU (i.e. I assume that the ratio between Europe’s ARPU vs APAC’s ARPU for Reddit is the same as Meta’s ratio). The final Reddit regional ARPU is then calculated based on above ratio

• For US, Meta reports US & Canada combined, while Reddit reports only US. I do not make any further adjustments here – simply showing US & Canada for Meta & US only ARPU for Reddit

• As per my initial deep dive, I divide the final ARPU for Meta for all regions by 2 (and this time also outside US ARPU is divided by 2, since further granular split of regions is made here), to adjust for the fact that Meta has 2 main money-making platforms (FB & Insta).

I went back through the transcripts to form an opinion on whether this is a red flag or a natural evolution.

The Stagnation in the Charts

Reddit defines a Daily Active Unique (DAUq) as a user identified with a unique identifier who visits within a 24-hour period. Those are further split between logged-in users (i.e. those that have an account) and logged-out users (i.e. those not logged in / without an account). For logged-out users, this identifier is typically a first-party cookie or a device-based fingerprint. For logged in, it’s their login.

While overall DAUq numbers are displaying robust growth - driven by logged-out US and ROW users - the logged-in US DAUq (dark blue on chart below) has been stagnating at 23m for the last four quarters.

In fact, the Log-in US base has plateaued, and even showed a -0.4% QoQ reductions in both Q2 and Q4 2025 (offset by 0.9% growth in Q3 2025 - but still, spooky) . While the long-term trend has been upward, there has been volatility in all past periods. For context, Log-in ROW and Log-out US were both in negative growth territory at points between 2021 and 2023. While all four key metrics exhibited significant volatility, they maintained an overall upward trajectory until the recent US Log-in stagnation.

Imporantly, Logged-out users both in US and ROW have increasing in share, with logged-out users currently representing 56% and 60% of US and ROW DAUq, respectively:

A Bi-Polar Platform: “Seekers” vs. “Scrollers”

It’s important to note that Reddit is not fully comparable to other social media platforms. Most of those require a login to view content, and due to their entertainment nature, you rarely end up on them via Google (you don’t usually find an Instagram cat video by googling it).

Reddit is a “bi-polar” platform:

• Logged-in Users: Typically open the app to browse a personalized home feed. More Instagram like - longer session duration but more passive scrolling.

• Logged-out Users: More often “mission-driven”. They arrive by searching for specific (Google) queries because they perceive Reddit answers as more authentic. These users exhibit high “intent” but low “interaction” - they read threads but do not vote or comment ; and don’t stay around for so long. They are “drive-by” visitors, resulting in lower time-spent compared to the 20–45 minutes averaged by logged-in users, but generally display much higher intent, as it was a specific problem / question that brought them to Reddit, so placing directed ads for such session can yield high returns to advertisers. During Q1 2024 earnings call management noted:

“.. Really important is that we grow our ability to monetize Logged-out users. Most of them are landing on what we call a post detail page or a comment page. Just a very specific page. In many cases, it’s talking about a specific product … There is an ad unit on that page, but I’d say we’re still in early days there, getting advertiser density so that we can have a well targeted ad on all of those pages. So, I think there’s lots of potential and monetizing Logged-out users. “

Indeed, the key issue of monetisation of logged-out users seems (to have been, back in Q1 2024) the lack of advertisers density to effectively target them. What good is knowing that a user that landed on “Grizl 5 Giant Bike specs” is into bikes, if no bike makers are advertising on Reddit - yet. Thus, with an increase in advertisers’ density, ceteris-paribus, the targeting naturally improves.

The Throttling Question: Why not force them to log in?

Reddit could technically “throttle” logged-in user growth by making the experience more painful for logged-out users - via a pop-up every time they open the page. Some would create an account to get rid of it; others would simply stop clicking on Reddit results.

However, management has moved in the opposite direction, as noted in the Q4 2024 earnings call:

“if you’re coming from search, we actually used to be more aggressive… we’d say "Hi, download the app, log in." That is a classic case of it works in the short term, it moves the numbers and it doesn’t work in the long term. It annoys people... We’re trying to make our customers happy. What are they there for? Answers, give them answers.... They’re not looking to join a community in the moment.”

Similarly, in Q1 2024 earnings call they noted:

”… from a product point of view, the best strategy for us is [not] to try to convert a Logged-out user into a Logged-in user in any particular session. They're usually coming from search. They have a question and we need to give what they're looking for [an answer], and we want to give them their answer”

Monetization: The Google vs. Meta Path

In my previous deep dive, I compared Google vs Meta ARPU. Google serves tailored, high-intent, expensive ads at the moment of search. Meta serves “passive” & predictable ads, but because users scroll for 30 minutes, they serve a much higher volume of cheaper ads. The ARPU is essentially a wash; Meta makes up in volume what it loses in price.

Reddit has both:

1. Logged-in users are like Meta users; they scroll subreddits, but you don’t always know if they are ready to buy

2. Logged-out users are often high-intent. If a user follows a Google search to a “Samsung Galaxy S25” thread, they are likely making a near-term purchase decision. You don’t need their age or gender; you just need to serve them a pricey, high-intent ad for a phone. Thus, despite anonymity, Reddit can still serve relevant ads based on your interests. Below excerpt from Q3 2025 earnings call:

“We don’t need to know who you are or necessarily even how old you are or other demographics because we look at your explicit interest on Reddit, right? Are you part of the skiing community? You’re probably in the outdoor stuff. Are you coming from a parenting blog? You’re probably a parent… it’s a little bit of a different model… it’s better for user privacy”

Management admitted in Q1 2024 that they were in the “early days” of monetizing these logged-out pages. Since then, they have focused on “instant personalization” to remove barriers for new users, moving away from “heavy-handed onboarding” questions toward a simple search box or a feed that is relevant to the context of how they arrived.

The Move to Stop Reporting

The decision to phase out the logged-in/logged-out metric in 2026 is because the line is blurring. If a user gets a personalized, high-value experience without logging in, the distinction matters less to the business.

As management stated during Q4 2025 earnings call:

“Logged-in users and logged-out users both see ads. And on an impression basis, the value of those impressions is the same... The real differential is around engagement... we don’t want having to be logged in to be a criteria for personalization.”

Now, what actually surprises me about this quote is that it goes against my Google vs Meta price-per click theory, where I say that logged-out users should command a higher per click / impression pricing, due to higher intent. Perhaps that’s because logged-out DAUq actually have the app downloaded - they just don’t log-in.

But, even if I’m wrong, the conclusion the management is drawing is the same - since both type of DAUqs bring similar overall money in, differentiating between then is relatively less important.

By the way, the distintion is anyway arbitrary. Wouldn’t it also be just as imporant for all social media sites to further split their DAUs between those that spend on average <10min and >10min daily on the site? Surely, the users that spend >10min daily can be served much more ads? And users that spend >30min perhaps even more so, or at least their purchasing habits and thus ARPU might be completely different? The granularity can then be increased ad-infinitum. DAUs active at night. DAUs active during the day. To think of it - isn’t the time spent by all users an even better metric than DAU to begin with? Yet, nobody breaks down DAUs or user base any further than them simply counting DAUs. Because it becomes messy, and prone to punishment in the “next quarter” mindset of Wall Street.

Conclusion

While this change came as a surprise, it is a natural continuation of the strategy management has guided toward for two years - and fully aligned with competitors. It proves that they are successfully monetizing logged-out users without needing to annoy them with banners. Eventually, a logged-out user will naturally want to comment or post, at which point they will open an account - but in a natural way.

We have seen this before: Netflix stopped reporting subscriber counts in 2025; Apple stopped reporting unit sales in 2018; Meta stopped reporting users app-by-app. All caused initial anxiety, but the companies are stronger than ever. There was no foul play - they just wanted investors to stop fixating on numbers that management views as no longer relevant.

At the end of the day, cash is what’s important. I am not concerned about this plateau in logged-in US DAUs, especially as long as total US DAUs continue growing (up 1.7% QoQ ; 9% YoY), and anyway at current price levels we’re not paying for much of DAU growth anyway. Prioritizing the “natural” path over forced conversions should pay dividends in the long run.

Bonus: ARPU Convergence with Meta

Reddit’s ARPU continues to converge with Meta’s, moving from ~26% in 2024 to 36% today. Note that the global ARPU comparison (without the US/ROW split) actually overstates Reddit's ARPU; when adjusted for their heavy US-centric audience, the convergence gap is closer to 4-5x rather than 2x implied by below chart. Maybe more on that again in the next post.

Above convergence is driven by a consitent growth in Reddit’s both International and US ARPU:

Since above chart makes it seems like US ARPU is growing faster than International ARPU (where most of DAUq growth can be expected to come from), here also a relative growth chart (100% being a starting point):

Everything tech in the USA is red. SaaSpocalypse. Reddit earnings out - they are fantastic - stock dumps. I guess Christmas came (very) early this year. I am now very deep into Reddit; it is now the second largest position in my portfolio. I have sold off part of my Polish portfolio (Vercom and cyber_folks) to have further liquidity if the price continues dropping. Since those two Polish companies are also SaaS, I have no idea why they are not dropping as well. Anyway, good for me I guess. Luckily, the rest of my portfolio doesn’t seem to care much about this bear market, so it can be easily liquidated for buying more Reddit (well, outside of Cetis, that is). If Reddit drops to the USD 100–120 range, I’m selling more of my other positions and buying even more Reddit. This could be a once-in-a-lifetime opportunity.

Amazon, Meta, Google, and Microsoft combined have announced USD 660bn of AI capex. That’s a gargantuan number. It makes you think that AI Agent proliferation is not out of the realm of possibility - certainly, the compute brute force required to keep developing models is not stopping yet. It could also end up badly, of course, if said capex does not result in revenues. I recommend Michael Burry’s Cassandra Unchained Substack for more insight on a potential AI bubble - and other topics.

Anyway, my portfolio has no / minimal exposure on the outcome of “AI bubble” so not so relevant. The question now is not whether such capex and AI is a bubble - but that it opens up a new potential existential threat to many businesses. Will the increase in compute and AI agents, such as Claude’s, result in the destruction of moats for many SaaS and software companies? It’s important to note that even if those companies survive, they could do so with a significantly different margin profile. Alive, but differnet - and by different I mean worse. If their services, which so far have been high-value and protected by a strong moat, get commoditized, they will not be able to reap any savings from “AI implementation” - they will need to pass them fully onto customers.

Heck, even KPMG this week was reported pressing its own auditor to “pass on” AI cost savings. A shot in their own foot? First thing I did when I saw the article is I sent it a CFO I know. I expect every KPMG audit client now to argue for the same. So who reaps the benefits of AI - the service provider (KPMG) or the client? It seems the client could win. You’re left with a weaker moat and compressed margins. Terrible news. Deflationary.

The Two Sides of the SaaSpocalypse

Now, I - in no way - see myself as an expert on the SaaS topic. But I do see see solid points on both sides, so want to lay out my thoughts:

SaaSpocalypse side: SaaS and many other software companies today get their margin via neat UX and a solid backend infrastructure. With the proliferation of AI agents, especially the front end might be under threat.

• Simple purchases (e.g., Apple Watch): Today, you go to Amazon because it’s convenient. But an AI agent can scan the entire web - including small sites you’d never bother to check - compare delivery speeds, costs, and Trustpilot ratings, and place the optimal order for you. Once you trust the agent, you just click “Confirm Purchase” it recommended you and you’re done. What moat does the Amazon store have left? Its moat to date was convenience, you knew you’ll get a fair deal there so why waste 30minutes to saved 5 bucks. But an AI agent can be bothered to check all other websites, a feat that would require you to “waste” hours. Sure, Amazon will still have the infrastructure layer (delivery), but how profitable can that be? Is it enough to justify valuations in the trillions? FedEx disagrees

• Medium difficulty purchases (e.g., a new fridge): Today you probably invest quite some time in this. You might use an LLM for a shortlist, then research “manually.” You will probably end up on Reddit at some point - ha. In the future, you tell the AI agent: “Please buy me a fridge, max width 100cm, budget $500, must be good for storing veggies. Burn the electricity consumption into the upfront price for comparison.” The agent scans the web, also scans Reddit (if it’s paying for the licensing, that is!), does the math, and places the order. Again, what moat is left in Shoper, Shopify, and other website builders? AI agents don’t care about neat UX and SEO. Sure, they might be left with the backend, but I can hardly see OpenAI fighting Shopify-like integrations also from smaller websites. If OpenAI’s agent doesn’t allow a search of the entire web, while Gemini does, nobody will use OpenAI for purchases, as you’ll save more using Gemini. A blurry picture; moats can disappear fast. Infrastructure remains, but you don’t make software margins on infrastructure - infra usually skews into commoditization

Arguments against: Will a big organization simply “vibe code” their ERP or CPaaS? Seems unlikely. AI agents would need to be extremely smart for this to start happening at scale. That surely must be years away - if ever. Security, compliance (GDPR), and reputational risks of “vibe-coded” software would be very high. In the near term, I can hardly see a big impact on large company-focused players. However, how will this look in 10, 20 years? We all know the importance of terminal value. If you’re not sure if Vercom or Shopify is still needed in 20 years, how much is the stock really worth today? Probably not as much as a few months ago; the threat is now real and “in your face”, however remote it still is, it does exist now. It’s plausible. For SaaS players focusing on SMEs, I see an even bigger and more immediate threat. When you’re a small company, you don’t care as much if your software is not 100% GDPR compliant - nobody has a target on your back yet. You just want to reduce costs. Employees will be motivated to “vibe code” solutions to problems that would otherwise require expensive subscriptions.

One might argue the pure backend/infrastructure is what will be important. I have two concerns: it assumes relatively “dumb” AI agents that are unable to replicate such systems (true today, but in 20 years?) and it assumes infrastructure alone justifies today’s valuations, which are based on infra + UX. I have doubts the infra layer wouldn’t get commoditized.

All in all, it seems murky. It indeed is not like Coca-Cola, where you can be sure it will still be around in 20, even 50 years. The lifetime and existential risk of these companies has truly been put into question. Disruption, while probably not immediate, and not certain, is now at least plausible. Especially since you are paying a lot for growth with these companies, the potential elimination of the terminal value component has a huge impact. I’m not sure where I stand on the topic, but that in itself makes me worried - how do you price a business if you’re not sure it will be around long term? Consequently, I sold half of my Vercom and cyber_folks positions, partially to have further firepower for Reddit.

Why Reddit is Different

Now, luckily there is a software stock (well, actually ad stock, but anyway) for which the above is a complete non-issue. In fact, it could even be a tailwind. That’s Reddit, of course. Now Reddit has been hammered over the past month, down more than 45%. When I wrote my initial Reddit thesis, I was wondering if the reader indeed ever would have an opportunity to see the USD 30bn market cap, which I marked as a “buy” price. Well, I guess Christmas indeed came early this year, as Reddit is now below USD 30bn.

Moltbook & AI agents threat: So someone presumably “vibe coded” a Reddit-like website called Moltbook, but where only AI bots can talk. Seems like some folks are worried this is a threat to Reddit. I cannot for the life of me get my brain around how an AI-agent-only forum would provide any value to anyone, let alone be a competitor to Reddit. If you have a question and you’re fine with an LLM answering, you’ll just ask ChatGPT - why bother manually searching Moltbook for the thread?

Secondly, Reddit’s moat is not the app that can indeed easily be “vibe coded” - anyone already before could easily make a forum app. But then what? You need to get people on the platform. And people are lazy. When you’re buying a fridge, or are sick, or have relationship problems, you don’t want to first scan the whole internet to find the best “home appliances,” or “hemorrhoids,” or “my gf broke up with me” forum site; then register, and then post your question there. Not to even mention this website probably looks so bad that even Berkshire’s homepage looks futuristic in comparison. It’s just so much easier to go on Reddit. You already have an account. You know the website is alive, and it’s very easy to find an applicable subreddit to post your question in. This is the Reddit vacuum effect, sucking in all the traffic of the old internet forums. It’s the same network effect that was the edge of Amazon and Meta.

In fact, I would argue if the world truly becomes AI agent driven, people will be even hungrier for human-to-human discourse. In the world of AI, this will become increasingly important. People will crave real human-to-human conversations. There’s only one website that does it best - Reddit. Huffman (Reddit CEO) said on the Q4 earnings call exactly what I wrote in my previous analysis: there are plenty of questions with no “straight” answer. For those, LLMs can’t spit out what you should do; you need to read opinions of multiple people and then come to your own conclusion. Reddit is safe and sound from the AI agent threat. In fact, any AI agent which will need to decide on behalf of the user what to buy will need real-world data of products to compare the choices - i.e., it will need Reddit data, which it will need to pay for. Bullish, 100% margin licensing fees. But, importantly, even if the “AI bubble” bursts and licensing fees go to zero, Reddit’s core ads business is not impacted at all.

Another scare is an increased wave of governments around the world banning the social media for teenagers. Again, this is actually bullish for Reddit, which relies on long-form content. Not pre-programming our youth to have an attention span of 5 seconds could only benefit Reddit in the long run.

Q4 Earnings

Revenue was USD 726m, up 70% YoY - higher than the 68% growth shown in Q3. As was expected based on Semrush data - and to anyone that actually understands the stock - DAUs continued to show strong growth of 4.7% QoQ, mainly on the back of international DAUq growth of 7%. This eases the fears that US growth has stopped - but indeed the growth in the US will be much slower as Reddit already has captured 15% of the US population vs only 0.9% of the total world population. ARPU also grew 42% YoY; it should be noted that in the advertising business Q4 is always the strongest revenue quarter (holidays season), so comparing QoQ revenue or ARPU growth for Q4 doesn’t make much sense.

Incremental net income margin (both YoY and QoQ) stands at 60%. What a machine of a business. Reddit also guided for USD 595-605m of revenues and USD 210-220 EBITDA for Q1. Especially considering Reddit has historically always underestimated its growth, this is an insane guidance, showing 50%+ growth could still be in play for 2026.

Additionally, a USD 1bn buyback has been approved. I believe at this price, this is a fantastic use of cash. I hear some complaints asking why they are “burning money” on a buyback: first, the stock is currently undervalued. Second, it’s not like they can use it on much else. Reddit doesn’t need capex to grow. It also doesn’t need to - and shouldn’t - start deploying it on AI servers like the other tech giants. It’s literally printing cash and has nothing to do with it. A perfect business.

With the current market cap of USD 26.5bn (USD 24bn net of cash), assuming revenues grow at 50% in 2026 and incremental NI margins stays in 40-50%, Reddit is currently trading at 22-25x forward 2026 earnings. For a company growing 50+% per year, and with such a clear path for future growth (see by deep dive on the stock) this is an extremely cheap price. Even assuming a nuclear case where 2026 revenue grows at only 30% and incremental net income margin drops to 30%, Reddit would still be expected to make USD 730m of net income in 2026, which would imply a 33x forward PE net of cash. Crazy numbers. This could really be a once-in-a-lifetime opportunity.

Analysts Rant

There are very few professions that are more despicable and useless than equity analysis. It’s a “wash your hands” profession. I understand a 100% buy rating might be a good sign for an institutional money manager whose “ass” is safe in case the stock tanks after he/she buys it - after all, all “experts” agreed the stock was undervalued. But in real life, one should note that WS analysts are a self-serving profession, and their main model input is the current stock price, not the fundamentals. Think about this for a second. The fundamentals are back-calculated. I never read those idiots’ posts; just check the track record of their recommendations and, as the saying goes, a monkey throwing darts would have done better. At least the monkey’s darts don’t take current stock price as in input for their direction. The world is all about the incentives, and the incentive of analysts is to not stand out of the heard too much, and to keep a good relationship with the management of the company they are covering, so they will get more “bones” thrown their way.

As such, some analysts reduced their price targets on Reddit this week. Of course they did so - since the actual stock price fell, which is their main model input, they had to. And I have no idea how they ever got to their old USD 250 price targets to begin with - it’s FAR above my price target and must’ve been based on some ballistic assumptions - which were back-calculated to match the then USD 250 stock price. Imagine this is your job.

1. Executive Summary

Reddit, Inc., headquartered in San Francisco, California, has evolved from an obscure, chaotic underground forum into a mainstream engine of the global information economy. While as recently as five years ago the platform carried a perception of being niche or nerdy - a place whose some users were shy to even admit they use the platform - the platform has steadily grown, now entering the mainstream, with Reddit now ranking as the 6th most visited website in the world, and 3th most visited website in the US. To this end, its now standing shoulder-to-shoulder with the big league platforms like Meta, TikTok, and X. However, Reddit is structurally distinct from these peers. Unlike Instagram or TikTok, which are primarily entertainment-driven and persona-centric (built on influencers), Reddit operates at a the intersection of social community, search utility, and knowledge database. It serves as the forum aggregator, effectively absorbing the user base of the fragmented “old internet” - the thousands of independent forums that once populated the web.

With its rapid growth fueled by accelerating network effects, the company presents a unique investment case. It’s well positioned for continued expansion, on one hand from its user base - as the “vacuum machine” of network effect continues to consolidate online forums & conversations - and on the other hand via its advertising revenue per user, which contains significant embedded optionality that the broader market is only beginning to properly price. Beyond that, Reddit is also shifting to more video and image based entertainment content, adding a layer of “vanilla” social media platform to itself. My investment thesis for Reddit is constructed on the following fundamental pillars:

• Ads implementation: Following nearly two decades of sub-optimal or non-existent monetization, Reddit has successfully engineered a pivot toward performance-based advertising over the last three years, increasing the number of ad-slots on the platform, driving the revenue growth of 68% YoY as of Q3 2025 - a rate significantly outpacing social media peers such as Meta, Snap, and Pinterest

• ARPU convergence: With Reddit still is in the early stages of monetization, its average quarterly revenue per user (“ARPU”) stands at only USD 5 globally, which is far below Meta’s USD 14, despite Reddit being much more US centric. This highlights a massive runway for growth, where unlike Meta, Reddit does not need to invent the new industry; it merely needs to execute on the known monetization playbook of its rivals - improving ad load, targeting efficiency, and format diversity - to unlock massive upside

• Users growth: Reddit has historically been heavily US-centric, with approximately 44.5% of its Daily Active Uniques (DAUq) currently based in the US (51.6m out of 116m). With the recent deployment of machine-translation technology, the company is paving a way for a multi-year runway for organic growth, with international DAUq growing at 31% YoY as of Q3 2025, significantly outpacing the 7% growth in the US

• The “human data” moat in an AI world: As the open internet becomes increasingly saturated with AI-generated content and SEO-optimized slop, Reddit’s repository of over 20 years of (mostly) human-generated conversation has transformed into a scarce industrial commodity - a raw material for the AI models. This data provides optionality for a high-margin revenue stream through licensing agreements with hyperscalers and LLMs

• Operating leverage and profitability: While optically expensive at a trailing PE ratio of 120x, the company has passed a critical inflection point in its unit economics. Gross margins have expanded to a world-class 91.0%, with incremental EBITDA margins currently standing at 60%. As a result, only a year after-first profitable quarter, the company has already achieved a 40% adjusted EBITDA margin in Q3 2025, generating USD 185 million in operating cash flow

However, Reddit investment case also comes with significant risks. With the stock trading at a 17x run-rate revenues (Q3 annualized), exceptional execution is required to sustain / outgrow its current valuation. The stock should also be expected to remain highly volatile and sensitive to ad-market fluctuations and the evolving landscape of the AI search, so is not suitable for “paper hands” investors. Nevertheless, for the long-term investor, Reddit represents a rare asset: a platform with the network effects of a social utility and the scarcity value of a primary data provider for the AI age. It remains one of those rare equities with the long-term potential to deliver a 10+x return from its current valuation over the next 10 years period.

I believe an investor should take an advantage of Reddit’s strong volatility, loading up on shares when the stock falls - which was also how I entered the stock in mid-2025, following the sell-off. Based on my valuation, I see Reddit as a strong buy at a USD ~30bn (USD ~160/share), and an all-in buy at USD ~20bn (USD 110/share). However, at the current USD ~40bn (USd ~210/share), Reddit, while not expensive per-say, offers only a limited downside protection to the investor, hence any buyer should be cautious with position sizing and needs to have a very strong conviction into the continued 50+% growth of the platform and/or assign material value to the LLM deals.

2. Company history and business model evolution

2.1 Reddit’s history and evolution

To understand Reddit’s current situation, one must first understand its history. Reddit was founded in 2005 by Steve Huffman and Alexis Ohanian as part of the inaugural Y Combinator batch. It began as a simple link aggregator - a “front page of the internet” where value was determined solely by user upvotes and downvotes. In contrast to the portals of Yahoo! or MSN that dominated the era, Reddit was based on the democratization of editorial control.

However, only 16 months after founding, both founders were burned out and felt they lacked a clear business model. Condé Nast (Advance Publications) acquired the company in 2006 for roughly USD 10m. At the time, this was life-changing money for the two young founders, who decided to sell and eventually exit the company.

Under Condé Nast’s ownership, there was de-facto complete lack of innovation for nearly a decade. While Facebook and Twitter were building sophisticated ad-tech and mobile-first experiences between 2008 and 2014, Reddit remained a desktop based forum with minimal monetization. The internal culture was strongly libertarian and anti-commercial, making the introduction of advertising also culturally difficult. As such, the site ran on legacy code, lacked a functional mobile app, and was notorious for its “wild west” approach to content moderation, which often alienated mainstream advertisers.

The return of Steve Huffman, one of the original co-founders, as a CEO in 2015 marked the beginning of the modern era. This period can be split into three key phases:

• Technical debt repayment (2015-2018): This phase involved rewriting the outdated codebase, launching of the official mobile app (late to the game), and redesigning the desktop experience (”new Reddit”) to be visually accessible to non-technical users. This period was contentious, as “old Reddit” loyalists resisted change, but it was necessary to modernize the infrastructure for scale.

• Sanitization and safety (2018-2022): Reddit purged toxic communities, implemented automated moderation tools, and created brand safe environments. This involved the banning of some notorious subreddits that hosted hate speech or illegal content, which was a prerequisite for attracting Tier-1 advertisers (e.g., Apple, Samsung, Coca-Cola) who had previously blacklisted the platform due to controversial content adjacency.

• Monetization and IPO (2023-Present): The aggressive rollout of the ads API, pixel tracking, and the eventual IPO in March 2024 (valuing the company at approximately USD 6.4bn) signaled Reddit’s entry into mature capitalism. The company began to aggressively enforce its API terms, cutting off free access to third-party apps and AI scrapers to protect its data value.

As of January 2026, Reddit has graduated from a “wild west” forum to a disciplined public company. It has successfully navigated the transition from a niche site for tech-savvy early adopters to a mainstream utility used by 116m people daily.

I strongly suggest reading We Are the Nerds by Christine Lagorio-Chafkin for more detailed background on Reddit’s history. It will be particularly revealing for critics who argue the business model is flawed just because it’s “20 years old company with minimal revenues”. The book shows that previous years were defined by management turmoil rather than structural failure. It proves that once a company moves past that internal chaos, disciplined revenue growth finally becomes possible - and the numbers confirm this.

2.2 The “community of communities” product mix

Reddit’s core product is not content creation in the traditional social media sense - users do not primarily visit to see influencers or lifestyle posts. Instead, Reddit creates deeper, more insightful content - it creates conversations. This is also helped by users’ anonymity - it is much easier to express your experience with a product/disease/political party without the fear of being stigmatised as a person, allowing conversations to flow more freely. The platform is organized into over 100,000 active communities (subreddits), each governed by a specific set of rules and a volunteer moderation force.

A subreddit is essentially a standalone webpage dedicated to one topic or interest. For example, if you like Porsches, you visit r/Porsche to see specific content about that brand. If you want to discuss geopolitics, you join r/Geopolitics. If you are a resident of Germany, you join r/Germany. This structure creates a unique value proposition for both users and advertisers:

• High-intent signals: Unlike a Facebook feed based on a social graph (who you know) or a TikTok feed based on an interest graph (what entertains you), a Reddit visit is often based on a problem-solution graph (or intent graph). A user in r/HomeImprovement is signaling an immediate, high-intent desire to purchase durable goods to upgrade their property. A user in r/SkincareAddiction asking about “retinol” is signaling specific commercial intent. This allows Reddit to serve highly contextual ads without relying heavily on third-party cookies or intrusive tracking, protecting it from privacy headwinds like Apple’s App Tracking Transparency (ATT)

• The search: A growing percentage of user sessions are search-driven. Users have learned that appending “reddit” to Google searches (e.g., “best budget headphones reddit”) yields authentic, human answers rather than SEO-spam or affiliate marketing farms. Reddit has become the unofficial “fact-check” layer of the internet. While this behavior historically occurred off-platform (on Google), Reddit is now capturing this intent directly. In 2025, Reddit launched Reddit Answers, utilizing AI to summarize thread consensus in response to user queries. This positions Reddit as a destination for knowledge retrieval, not just passive scrolling. I would note, however, that in it’s current form - in my personal opinion - Reddit Answers is not a very useful tool, and I see little benefit of using it over ChatGPT/Gemini - it needs a lot of further refinement

• Low moderation costs: Subreddits are governed by moderators (”mods”). Anyone can set up their own subreddit and grow it into the mainstream - while serving as that subreddit’s mod. The challenge for mods is to keep engagement high while filtering low-quality or off-topic posts (e.g., preventing political debates in r/Music), which would lead to users leaving said subreddit for another, actually topic-dedicated one. This is distinctly different from platforms like Meta, where moderation is centralized and paid for by the company (often involving thousands of contractors). At Reddit, the bulk of moderation is performed by volunteers. This “free labor” force, combined with the text-heavy format (which is cheaper vs video and image hosting, facilitates industry-leading gross margins of 91.0% (vs c 80% for Meta and Pinterest)

2.3 Revenue streams

2.3.1 Advertising (the core engine)

Advertising remains the dominant revenue driver, accounting for approximately 94% of total revenue as of Q3 2025. The evolution of the ad stack has been rapid and is the primary cause of the revenue acceleration seen in 2025:

• Performance advertising: The company has successfully moved beyond CPM (cost per mille) brand awareness campaigns to CPC (cost per click) and conversion-based objectives. The introduction of “Max” campaigns uses machine learning to automate bidding and targeting, significantly lowering the barrier to entry for smaller businesses who lack sophisticated in-house ad teams. Automated bidding saw over 50% year-over-year growth in adoption

• Shopping & commerce: The launch of Dynamic Product Ads (DPA) allows advertisers to upload product catalogs and retarget users based on discussion context. This is critical for capturing e-commerce spend, a massive TAM where Reddit has historically underperformed. Early data shows DPA delivering 2x higher Return on Ad Spend (ROAS) compared to legacy conversion campaigns

• Video & interactive: Video ad impressions have shown high double-digit YoY growth, catering to the consumption habits of younger demographics and allowing Reddit to tap into budgets typically reserved for TikTok or Instagram Reels

• Unduplicated Audiences: Reddit’s audience has a high “unduplication” rate, meaning they are hard to reach elsewhere. Approximately 30% of Reddit users are not on Facebook, roughly 45% do not have Instagram accounts, and about 60% are not on X or TikTok. Thus, Reddit enables advertisers to target a demographic cohort - often tech-savvy and high-income - that is elusive on other platforms

2.3.2 Data licensing (the “free option”)

The broken internet

In the past, websites and content creators produced content to capitalize on ad revenue from human traffic. Websites optimized for two things: getting visitors (SEO) and monetizing them (ads). This ecosystem was disrupted by the proliferation of LLMs. As LLMs increasingly answer user queries directly (via ChatGPT, Perplexity, or Gemini), they scrape websites without generating ad impressions for the creators.

LLMs do not “invent” facts; they recycle and synthesize existing information. While this is efficient for users, it creates an economic impossibility for the open web over the long term. If creators are not compensated, they will stop creating, leading to model collapse where LLMs run out of fresh training data. Thus, it is inevitable that the internet will transition to a pay-to-play API model, where AI companies must pay for access to high-quality data.

Reddit is the only platform that offers this data at scale: 20 years of conversational pairs (questions and answers), structured in threads, with a voting system (upvotes/downvotes) that acts as a natural quality filter, all the while continuously providing up-to-date discourse on the most recent world events.

Under “Other Revenue,” Reddit is already monetizing this reality. In 2023, Reddit locked its API access, preventing unauthorized scraping. In 2024, Reddit signed landmark deals with Google and OpenAI (together estimated at USD 130m/year), granting these firms access to real-time data. These deals were signed at the inception of the AI boom and are set to expire/renew around 2027.

Reddit has also taken an aggressive stance against unauthorized scraping. To this end, it has filed lawsuits against Perplexity and Anthropic for illegal scraping of its data, which could establish a critical precedent, framing scraping not just as copyright infringement but as “trespass” on servers and breach of contract (Terms of Service).

If courts uphold Reddit’s right to gate its content, with one of the largest repository of human discourse, the moat widens significantly. AI models need human conversational data to learn nuance, slang, reasoning, and subjectivity. Wikipedia teaches grammar; Reddit teaches how people talk.

The implications - and the optionality component:

While Other Revenue was only USD 36 million in Q3 2025 (up 7% YoY), this revenue flows almost entirely to the bottom line at nearly 100% margin. The relatively low YoY growth, due to already established multi-year data deals with Google and OpenAI is unsurprising, however with both contracts expiring and up for renegotiations in 2027 (note: contract negotiations with Google have already started), this stream could see substantial upside, representing a “free call option” embedded in the stock price.

While quantifying the value of data-licensing deals is challenging, the strategic optionality they provide is immense. In the race for AI supremacy, OpenAI’s massive investment in high-performance datacenters could be rendered inefficient if competitors secure superior “raw material” - high-quality training data. For instance, an exclusivity deal between a platform like Google and a major data source could make OpenAI’s heavy capex look overpriced; superior data allows for higher-quality outputs with less brute-force compute. Moving forward, licensing fees will likely transition into a standard component of COGS. Given that Reddit is consistently ranked as a top-three source for LLM training, its pricing power is significant. When OpenAI signed its USD 70m deal in 2024, it represented roughly 3.5% of its USD 2B revenue. It is, therefore, plausible that Reddit could command 1-3% of total LLM market revenues in the future. With projected industry revenues hitting USD 100+bn over the next 10 years, this would translate to USD 1-3bn in annual licensing fees - flowing directly to the bottom line; pure cash.

2.3.3 The user economy

Reddit is nascently developing also a user economy, including Reddit Premium subscriptions and the contributor program, where users can earn money for high-quality posts (via Gold). While this aligns incentives, it remains a minor financial contributor compared to Ads and Data. However, the potential for paid subreddits (Substack/Onlyfans style communities) represents future optionality for recurring revenue.

There is a significant ‘hidden’ upside in NSFW content that remains hard to quantify - and realise. For context, adult content NSFW subreddits account for approximately 5% of Reddit’s daily post volume. Using OnlyFans - which reported a 2024 pre-tax profit of USD 700m as a benchmark, this represents a potential “optionality” net income of roughly USD 500m for Reddit - which would be the best case outcome anyway. However, due to the friction of monetizing adult content without alienating blue-chip advertisers, I do not include it in my valuation, nor do I, unlike the LLM licensing fees, consider it as a “real” or material upside. Similarly, while Reddit’s new “paid subreddit” features (aimed at Substack-style creators) offer a path to direct monetization, I expect these revenues to remain immaterial compared to the primary advertising machine.

3. Financial analysis: the inflection point

3.1 Recent performance snapshot and operating leverage

The third quarter of 2025 solidified Reddit’s status as a profitable growth company. The table below reconstructs key metrics, highlighting the magnitude of the inflection.

The most important feature of Reddit’s 2025 financials is the expansion of profitability:

• Gross margin: Reddit’s cost of revenue (hosting, infrastructure) is extremely low. For every USD 1.00 of incremental ad sales, USD 0.91 is available to cover operating expenses. This is superior to Meta (~80%) and Snap (~55%), largely facilitated by Reddit’s predominantly text-based format versus the heavy video infrastructure required by competitors

• EBITDA conversion: This combination of elite gross margins and efficient moderation costs makes the business exceptionally lean. To this end, Reddit has reached a critical inflection point in its EBITDA conversion. By scaling revenue against a largely fixed cost base (R&D and SG&A), the platform is unlocking “world-class” incremental margins. Management highlighted this scalability in their latest earnings call, noting an incremental adjusted EBITDA margin of 60% - a clear indicator of the platform’s massive earnings power as it matures

• Cash flow and balance sheet: Operating cash flow reached USD 185m in Q3 2025, up USD 114m YoY. Free Cash Flow (FCF) mirrored this at USD 183m, due to negligible capex of roughly USD 2 million - less than 1% of revenue. This low capital intensity is a distinct advantage over competitors like Meta or Google, who are spending tens of billions on AI data centers. Reddit leverages cloud providers and creates the data for AI, rather than bearing the heavy cost of training AI. In turn, the company currently has USD 2.23bn in cash and marketable securities - increasing at c USD 200m quarterly and at an accelerated pace as net income equals cash-flow, with no debt

• Dilution Control: Total fully diluted shares outstanding decreased to 206.1m in Q3 2025, down 0.1% year-over-year. This signals that Reddit is managing Stock-Based Compensation (SBC) aggressively, transitioning from a dilutive growth phase to a shareholder-friendly maintenance phase. Nevertheless, a 1-3% annual dilution rate going forward can be expected

3.4 Geographic revenue disparity and overall ARPU

A key driver for future financials is the monetization gap between Reddit and its rivals (Meta). Reddit averages a blended ARPU of USD 5.0. In comparison, Meta’s blended global ARPU is approximately USD 14 as of Q3 2025. However, the real disparity is evident after adjusting for Reddit’s currently US centric audience - with 44% of total Reddit DAU being US based vs only 8% for Meta, Reddit’s blended ARPU is “inflated”.

*) Please note Meta’s ARPU is for US + Canada, while Reddit reports numbers for US only

*) Please note Meta’s ARPU is for US + Canada, while Reddit reports numbers for US only

**) Please note the actual Meta numbers for US have been adjusted - divided by 2 - to correct for the fact that Meta has 2 main platforms (Facebook and Instagram) whereas Reddit only has 1 platform. Please also note that for International this adjustment was not done to not be overly conservative, so to roughly cancel out the fact that Reddit internationally is mostly present in Europe, where ARPU is relatively higher compared to APAC and ROW

Meta’s US & Canada only ARPU in Q3 2025 was approximately USD 76. Please note that Meta does not explicitly break down ARPU by geography, so I calculated this based on its estimated 280m DAU in US & Canada, generating USD 21bn of ad revenue in Q3 2025, for an implied quarterly DAU of USD 76 - 15x higher compared to Reddit’s US 9 ARPU of USD only. To be conservative this number was further adjusted for the fact that Meta has 2 key platforms (FB & Insta), so I divide Meta’s ARPU number by 2 for US & Canada. Thus, ultimately we can see that Meta’s US & Canada ARPU on a conservative like-for-like basis is USD 38 vs Reddit’s USD 9 - a 4x delta.

Similarly, the international ARPU discrepancy also stands at 4.8x. I would note again that since numbers for Meta are for US & Canada only while for Reddit they are for US only, Meta’s US & Canada APRU as per above is likely slightly understated (as US only ARPU should be higher than combined US & Canada ARPU), while Reddit’s international ARPU is likely comparatively overstated (due to it including Canada) - however taking both together it should be a wash.

Above 4-5x ARPU discrepancy can thus serve as a good guide for the bull case or “ceiling” for Reddit’s ARPU growth.

3.4 The intent premium

One of the key differences between Reddit’s and Meta’s users is that Reddit’s users for advertisers is that on Meta you advertise for reach (i.e. people are just passively scrolling the platform), while on Reddit - similarly to Google - people are often actively searching for the problem (i.e. have and intent). This adds a further “intent premium” to Reddit’s ARPU, for which - in theory - premium pricing should be possible.

This premium pricing is evident when comparing Google vs Meta ads, whereas Google can typically charge 4-5x more per click than Meta. This is because a Google user typing “plumber near me” is significantly closer to a purchase than a Meta user who simply “likes” home improvement content.

However, despite the much higher price of ads, Google’s ARPU remains very similar to Meta’s. This is because Google search is transactional: you go to Google with a problem, find the answer, and leave. You might only see 2 or 3 ads during that 30-second session. On the contrary, Meta is addictive: you go to Instagram or Facebook to browse. In a typical 30min session, Meta shows you 20+ ads As a result, even if Google’s ad costs USD 5.0 and Meta’s costs USD 0.5, both companys’ ARPUs stands at the same level at c USD 15.

While some users utilize Reddit specifically for high-intent searches - which would typically command a premium ad rate - these users theoretically would exit the platform, or at least its search function, shorty after finding their answer. Conversely, the majority of Reddit’s DAUs engage with the site as a social media and entertainment platform, similar to Meta’s ecosystem. Historically, Google and Meta demonstrate that the resulting ARPU tends to equalize across these different engagement models. Therefore, I have not applied any upward adjustment to Reddit’s calculated ARPU. Doing so would risk 'double-counting' by applying high-intent search pricing to a user base that largely exhibits social-media-style engagement. Since Google and Meta's figures suggest a similar ARPU outcome, we will proceed using Meta’s benchmarks alone.

4. Competitive landscape and market positioning

4.1 The social media cohort

Reddit trades in a basket with Meta, Snap, and Pinterest. However, its current growth profile distinguishes it as an outlier in the group.

• Vs Meta: Reddit cannot compete on scale (116m vs 3.5bn DAU), but it competes on intent. A user on Instagram is often bored and scrolling passively; a user on Reddit is often researching a problem. This “intent” signal, for that portion of traffic that is intent driven, could theoretically command higher ad pricing over time, closer to Google Search than Facebook Feed, as per outlined in the section above

• Vs Pinterest: both are “search” platforms, but Pinterest is visual (inspiration) while Reddit is textual (information). Reddit’s still predominately text data is significantly more valuable for LLM training than Pinterest’s image data, and it is cheaper to host (91% gross margins vs Pinterest’s ~80%)

• Vs Snap: Snap struggles with profitability and intense competition from TikTok. Reddit is accelerating in both growth and profitability, benefiting from a “text-based renaissance” where users seek authentic answers over algorithmic entertainment

5.2 The AI search threat

The elephant in the room for Reddit is the paradigm shift from Google Search to AI Answers (e.g., ChatGPT, Perplexity, Google AI Overviews). The elevated fear of this was also one of the key drivers for the stock’s mid 2025 pullback - as well as it’s current persistently elevated volatility.

• The risk: If users ask ChatGPT “best running shoes for flat feet” instead of Googling it (and clicking the Reddit thread result), Reddit loses traffic. This is an existential risk to the “logged-out” user growth funnel

• The hedge: Reddit’s data licensing deals ensure that even if the traffic doesn’t come to Reddit, the revenue does (via license fees). Furthermore, Reddit is integrating its own AI search summaries to keep users on-platform. Finally, Reddit really is built on two layers - the search and itself being an entertainment platform

• Reality: While still to early to tell conclusively, contrary to the narrative that LLMs would cannibalize Reddit’s traffic, Reddit’s growth actually accelerated through 2024–2025. This suggests that in an era of AI-generated content, users increasingly value “human verification” as an authenticity filter. While AI provides efficient summaries, users still visit Reddit to cross-reference those results against lived experiences. This is in part because LLMs are optimized for objective synthesis, whereas many human inquiries - such as product recommendations or relationship advice - are inherently subjective. These “gray-area” questions require the circumstantial nuance and diverse perspectives that only a community of real people can provide. Furthermore, Reddit’s anonymous nature encourages a level transparency on sensitive topics that is hard to found elsewhere

It shall also be noted that Reddit currently sources only 0.1% of it’s total traffic from the AI platforms, meaning the swings in LLMs recommendations / sources have de-facto no impact on Reddit whatsoever.

While engagement remains robust, the primary risk to Reddit’s organic growth is its dependency on Google’s search ecosystem, which currently drives approximately 62% of the platform’s total traffic. Any adjustment to Google’s ranking algorithms represents a significant “top-of-the-funnel” risk that can directly impact new user acquisition. Although Reddit maintains a collaborative relationship with Google - bolstered by high-value content licensing agreements - Reddit remains the junior partner in this exchange. Historically, Google’s “throttling” of Reddit results have triggered notable stock price volatility.

However, Reddit’s best defense is its increasing scale. By establishing itself as the “Coca-Cola” of the internet, Reddit could move toward a position of must-carry status. Just as a retailer cannot afford to exclude Coca-Cola without losing customers, Google might eventually reach a threshold where failing to rank Reddit highly would degrade the quality of its own search results. As Reddit’s standalone brand authority grows, the power dynamic shifts: it becomes in Google’s best interest to prioritize Reddit content to prevent users from bypassing Google entirely. Crucially, this threat primarily concerns the conversion of new visitors; Reddit’s core DAUs increasingly interact via the app, providing a growing “walled garden” of traffic immune to external algorithm shifts.

7. Governance, ownership and insider risk

7.1 Concentrated control via dual-class shares

Investors must understand they are buying into a controlled company. Like many other tech-companies, Reddit utilizes a dual-class share structure, with Class B Shares, held by insiders (Advance Publications, Tencent, Sam Altman, Steve Huffman), carrying 10 votes per share. Class A Shares, available in public float, are carrying 1 vote per share. To this end, Advance Publications (parent of Condé Nast) and Steve Huffman effectively control the company. Shareholder activism is structurally impossible. If management decides to pursue a suboptimal strategy (e.g. Meta-style pursuit of metaverse), public shareholders have no recourse.

7.2 Insider selling activity

Recent months have seen significant insider selling. CEO Steve Huffman and COO Jen Wong have sold substantial blocks of shares. Additionally, Advance Publications has reportedly sought to monetize or hedge parts of its stake. While optically negative, this is typical liquidity management for executives and early investors post-IPO - else why would they have pursued the IPO to begin with. Personally I am a firm believer of the old adage “management might sell for many reasons, but they only buy for one reason”, thus do not view insider selling, especially around IPO, as a red-flag.

8 Key risks

• The “dead internet” theory & bot fraud: A significant portion of web traffic is becoming bot-driven, including on Reddit. If advertisers lose faith in Reddit’s “human” metrics due to bot infestation, ad pricing (CPM) could collapse, and user engagement could also fall. Reddit’s entire value proposition is “real humans,” so maintaining the integrity of the platform against AI bots is an existential operational challenge. The company must constantly evolve its detection capabilities to ensure the human layer remains genuinely human, while continuously balancing also the user’s anonymity, which is one of the key differentiators of the platform vs competitors

• Regulatory risks: Global regulators are increasingly scrutinizing data-training agreements, posing a direct threat to platforms like Reddit. Should users be granted “opt-out” rights regarding AI training, the resulting contraction in data volume could significantly devalue the licensing deals. Simultaneously, stricter age-verification mandates - exemplified by Australia’s recent ban on social media for minors - threaten to shrink the active user base. Finally, intensifying trade tensions and geopolitical friction place a target on US tech platforms, making them prime candidates for retaliatory regulatory measures from foreign governments

• Execution risk: At these levels, the valuation leaves little room for mistakes. For a long-term investor, the real threat isn’t market volatility; it’s a breakdown in fundamentals. Whether it’s over-monetizing to the point of driving users away, a total failure of the revenue model (reminiscent of Snapchat), or a slide into corporate inefficiency, the risk is the same: permanent loss of capital. If the organization becomes too bloated to pivot, the buy and hold strategy may never actually lead to a break-even point

• Moderator rebellions: Reddit relies on unpaid labor (moderators). If Reddit pushes ads too aggressively or degrades the user experience, moderators can strike (as seen in 2023), blacking out communities and halting ad impressions. This labor risk is unique to Reddit

9. Valuation

9.1 Relative valuation

While I’m not a fan of relative valuation, and usually don’t consider it for my investments, I believe it’s granted to shortly discuss Reddit’s relative valuation, as one of the most common criticisms of Reddit is that its “egregiously” overpriced.

While Reddit trades at a premium 17x PS ratio - a multiple typically reserved for high-growth VC startups (which Reddit is, btw) - its underlying fundamentals and unit economics are arguably the best in its peer group. Despite achieving profitability only a year ago, Reddit’s Adjusted EBITDA margins already exceed those of Pinterest. Furthermore, its incremental EBITDA margin stands at a exceptional 60%, positioning the company to eventually rival Meta’s efficiency. My valuation, outlined in the next section, conservatively assumes no further expansion of this incremental margin, accounting for potential gross margin pressure as Reddit continues to pivot toward more resource-intensive video and image formats. Notably, Reddit’s user growth alone is currently matching the total revenue growth rates of Meta and Pinterest. When combined with its potentially-aggressive closure of the ARPU gap, Reddit is effectively growing three times faster than its primary competitors.

Please note that below data utilizes Q3 2025 figures, as TTM (Trailing Twelve Month) data remains skewed by the Reddit’s recent break-even inflection point.

Nevertheless, clearly Reddit’s premium valuation is justified only if revenue growth remains at currently elevated levels. In turn, in case of deceleration of growth, the multiple could be compressed rapidly, making Reddit a stock that offers limited “pricing” downside protection to the buyer. However, subject to Reddit’ continued growth, the buy and hold investor should get in-the-money eventually, all the while carrying significant upside optionality.

9.2 My valuation

Given the inherent uncertainty in long-term growth projections, I have adopted a scenario-based valuation framework that paints different scenarios / stories of Reddit’s potential “mature” state in 2035. I evaluate implied investors’ returns across three distinct entry-point market capitalizations: USD 40bn (current valuation), USD 30bn, and USD 20bn (“MktCaps”). In each case, the terminal valuation is derived using a PE multiple, with cumulative net income - which functions as a reliable proxy for cash generation at Reddit - added as a year-end 2035 cash position. Notably, this model excludes potential revenue from LLM data licensing agreements beyond their current level, but also excludes future dilution. I believe this overall, combined with also a conservative Meta convergence ARPU assumption (division by 2) is still a conservative approach, as the optionality on USD 1-3bn annual licensing potential remains almost a “free option” and, together also with conservative ARPU ceiling, significantly outstrips the future dilution downside. Below the cases:

• #1, Nuclear Case: Assumes Reddit completely stops growing from its 2025 levels. Due to the high valuation, as the multiple compresses, the IRR is negative for all MktCaps. Even a buy-and-hold investor will never break-even in real money terms

• #2, Bear Case: Assumes Reddit’s ARPU (both US and international) double. Furthermore, international DAU also doubles (thanks to machine translation), while the already relatively saturated US DAU fully stagnates. As a result, the investor would be looking at a no principal loss / minimal return under the current USD 40bn market cap scenario, however this still bear case starts to provide a decent floor IRR of 2-13% under the USD 20-30bn market cap scenarios

• #3, Conservative Case: Assumes Reddit manages to, in the next 10 years, double both the ARPU and DAU, implying a 10y revenue CAGR of 16%. Given the current 19+% YoY growth of each of the two metrics, and Reddit’s currently still small share of overall digital ad spend, plus its accelerating international expansion, I consider this as a conservative and highly possible scenario. Assuming a 20x exit PE (meaning the company needs to still have some “future promise” in 2035) a 10% IRR is reached already at the current market cap of USD 40bn

• #4, ARPU Case: Assumes Reddit’s manages to fully converge its ARPU to Meta’s level, but with zero DAU growth. De-facto this means that Reddit presses ahead hard on monetisation, in turn driving away user growth. IRR under current USD 40bn market cap stands at 5-11% at 10-20x terminal PE, respectively.

• #5, DAU Case: Assumes Reddit’s manages to fully converge its DAU to Meta’s level, but with zero ARPU growth. Could happen if a fundamental shirt in digital ads market takes place, taking away all of Reddit’s pricing power. IRR under all MktCaps scenarios turns double digit

• #6, Meta ARPU, 500m DAU Case: This would serve as my optimistic base-case. It assumes that Reddit manages to fully converge its ARPU with Meta’s by 2035. Furthermore is DAU base increases from the currenet 116m to 500m, of which US DAU incrases by 1.5x, while int. DAU are assumed to increase by 6x. I see this as an optimistic base case as it de-facto assumes Reddit manages to successfully copy Meta’s playbook - but as of Meta today (i.e. by 2035 Meta’s ARPU will likely already be much higher). Implied 10y revenue CAGR of this scenario stands at 29%, and a very healthy 15-22% IRR is reached already at the current USD 40bn market cap

• #7, 50% Meta Case: Assumes Reddit’s manages to converge its DAU and ARPU to 50% of Meta’s 2025 levels. Similar to case above, a very healthy 18-25% IRR is reached already at the current USD 40bn market cap

• #8, Meta Case, or the upside case: Assumes Reddit’s current 50+% revenue growth persists for the next 10 years, allowing Reddit to fully converge both its DAU and ARPU to Meta’s level. 35-54% IRR is reached, depending on the entry valuation

As per my other posts, being a downside focused investor, I consider the current USD 40bn market cap to provide somewhat limited downside protection (see Bear Case). While it may still present a somewhat decent price due to potential growth runaway, I would caution on position sizing at these levels. Instead, as outlined in the first chapter, I believe an investor should take an advantage of Reddit’s strong volatility, loading up on shares when the stock falls.

As such, I see Reddit as a strong buy at a USD ~30bn (USD ~160/share), as this is where even the the Bear Case (2-8%) starts to offer acceptable “downside” returns, while the upside case (Meta Case) has potential to deliver world-class 39-48% IRR. If on the other hand we see another pullback to USD ~20bn range (USD 110/share), I consider Reddit a an all-in bet.

9. Appendix

Detailed valuation table incl. 2035 implied DAU, ARPU, Revenue and Net Income assumptions: