Reddit's Q2 Beat Overshadowed by Search Fears; Wait for Better Entry Still Prudent

What happened

Reddit delivered a stellar Q2 with 61% revenue growth and strong profitability, yet shares tumbled over 20% on AI-driven search referral concerns. The ad engine remains robust, with ARPU up 36% and gross margin at 91.3%, and Q3 guidance topped consensus. However, other revenue, which includes AI licensing, was just $43.3 million, and management still warns there is 'no assurance' it becomes meaningful. Our analysis suggests the stock at $139 still prices in significant licensing upside, limiting margin of safety. The pullback brings the stock closer to our $125 attractive entry, but more evidence is needed to upgrade our stance.

Implication

The post-earnings sell-off eases valuation pressure but does not eliminate it, as unproven AI licensing remains priced in. Strong ad execution and buybacks provide downside support, yet the stock sits above our base-case value with only modest upside. A sustained drop toward $125 would offer a clearer risk-reward if DAUq and ad margins hold. Watch for a step-up in other revenue or management dropping the 'no assurance' language, which would validate the second earnings leg. Until then, maintain a WAIT stance and focus on Q3-Q4 2026 results for evidence of a durable inflection.

Thesis delta

The thesis shift from our master report is minimal. The sharp decline from ~$178 to $139 reduces valuation risk but does not yet reach our attractive entry range of $125. We remain on WAIT, as the AI licensing thesis remains unproven in reported numbers, and the ad engine alone doesn't fully justify current multiples relative to our base case of $150. A rating upgrade would require either a further price drop toward $125 or clear acceleration in other revenue from the Q3-Q4 2026 reports.