Reddit Q1 2026 Earnings Update
Earnings Recap, Cranking ARPU Further by Closing Monetization Loops w/ Shopping-in-App and Search Ads, International Growth, Overall Thoughts
Earnings Recap
Reddit Reported earnings on Thursday AH, reporting a very strong revenue beat that sent shares up 13% on Friday. Overall revenue grew 69% Y/Y and advertising revenue grew 74%.
I am sure a beat was expected but the magnitude of this beat was surprising (4% above each average) as you can see in the chart above.
Gross margins expanded 1% Y/Y to 91.5%. Given a sequential opex decline of about $10mm (partly due to lower outbound ad pricing), Reddit posted a 28% EBIT margin, an extremely impressive result given that Q1 is seasonally the weakest revenue quarter of the year. That 28% EBIT margin is up from 1% in the year-ago quarter.
Reddit guided to Q2 revenue growth of 44%, which seems like topline deceleration at first glance, but given the particularly tough comp to Q2 2025 where revenue grew 78% Y/Y (ad revenue was up 84%), the guide is essentially unchanged in terms of absolute new revenue dollars. Reddit guides conservatively by 12.5% on average. Assuming Q2 is ‘average’, that’s 56.5% growth against a comp that’s over a 10% higher growth rate than each quarter next to it, still a strong guide. It doesn’t really matter anyway, the market is more than efficient enough to realize this as well; if the guide was actually light shares would not have flown up 13%.
Traveling further down the earnings line items, Reddit reported very strong net income margins of 31% thanks to $23mm of interest income on their $2.65Bn avg. cash balance during the quarter and a low tax rate of about 1% given the NOL carryforwards Reddit is now monetizing. Hence my focus on the reliable EBIT margin, stripping out all these non-operating items.
Free cash flow was exceptionally strong this quarter (37% margin ex-SBC) as Reddit spent a single million dollars on capex (0.2% of revenue) and working capital balances swung down Y/Y.
To state the obvious Reddit remains an incredibly capital light business. Q1’s operating capital balance (working capital minus cash plus operating leases, intangibles, and goodwill) sat at $436mm, a balance that I expect to drive 2.7x it’s weight in EBIT during 2026. Reddit invests primarily in the opex line, but still, a very low necessity to spend on fixed assets is nice to see. Dilution during the quarter came in at 0.1% Q/Q and 0.2% Y/Y, and about $5mm worth of shares were repurchased.
Cranking ARPU Further
My last post on Reddit focused almost entirely on ‘Cranking ARPU’ and advertising efficiency metrics. What did Reddit accomplish this quarter that helps them in that regard?
In March 2026 Reddit partnered with Pacvue’s Commerce Operating System, essentially an advertising distribution agreement. Pacvue powers 12% of global retail media spend for over 70,000 brands and agencies, giving Reddit advertising distribution and some workflow plumbing: advertisers on Pacvue can create and deploy campaigns across advertisers in Pacvue’s platform, and now Reddit sits alongside the likes of Amazon, Walmart, and Instacart in retail ads on Pacvue’s platform. Pacvue naturally takes a small commission on these ad sales but it brings in more revenue without commensurate direct sales spending from Reddit, so it’s a win-win.
Reddit launched an integration with Shopify, allowing Shopify sellers to easily and simply launch an advertising presence on Reddit, integrating their product catalogs with Reddit’s shopping ads automatically, including purchase attribution through Reddit’s Pixel. This integration is early and in the process of ramping.
These first two callouts, the Pacvue and Shopify partnerships, don’t drive the kind of slam-dunk ARPU growth we see from upgrades to Reddit’s core ad stack (like Reddit Max and DPAs), but each of these drives incremental ad spend over the long term. If you stack up enough integrations and partnerships like this, as Reddit has been doing for over a year now, it starts to make a real difference. More importantly it just goes to show that Reddit is serious about getting their ads in front of as many advertisers as possible.
Reddit Max launched to Beta in early Q1, seeing strong adoption; on average, advertisers are seeing a 17% reduction in cost per action and 25% more conversion outcomes when running Max campaigns. Advertising auctions are like an exchange business, if you can bring trading costs down, people just trade more and you get the revenue back anyway from higher volumes. Most of that 17% cost reduction ends up getting spent back on Reddit ads — advertisers optimize to ROAS targets long-term, so when ROAS improves materially (~40% on the same dollar given the cost reduction and conversion lift), budget just flows back in.
DPAs continue to pull their weight in Reddit’s ad stack and the ramp is still in it’s early days:
“Again, very early. Right now there there are still thousands of advertisers that can adopt DPA that haven’t adopted yet[…] we’re still early, we’re still focused on retail and retail catalogues[…] folks use DPA for travel, for auto, for other categories that we haven’t even focused on to date. I think there’s a long road map of opportunity here for us.” — COO Jennifer Wong, Q1 2026 Earnings Call
Reddit gave us a few advertising case studies from Q1 in their Shareholder Letter, from Liquid I.V. and Cozey:
Closing the Loops
Historically Reddit has been a destination where people go to research products and services before pulling the trigger. That trigger-pulling has always happened on other websites like Amazon, an open-loop system where Reddit is not the end destination. Now, Reddit is beginning to close that loop with Search Ads and In-App Shopping.
Over the past year Reddit has spent time upgrading the core search function within the app and website. Now the search bar looks better, it comes with autocomplete, it’s visible all the time even when scrolling down, and search is integrated with Reddit’s new Answers feature; instead of having Google’s AI overview summarize Reddit, you can just go directly to Reddit and have Reddit summarize itself.
Reddit’s shiny new search bar:
Reddit’s Answers feature:
Concurrent with these upgrades to search functionality, Search weekly actives have been growing 30% and remained at that growth rate in Q1. Reddit’s management team have told us that this functionality will eventually be monetized in a similar fashion to Google’s Search Ads.
“Search is one of the few products that hits every cohort of users. It helps core users discover new content and answer questions, it helps new users find their home on Reddit, and it helps seekers get answers faster. And then, it’s search; Ads on search result pages is literally the best business model on the internet.” — CEO Steve Huffman, Deutsche Bank 33rd Annual TMT Conference
Reddit has already trialed limited rollouts of this Search Ads functionality.
“The carousel highlights products directly mentioned by users from real conversations on related posts and comments, and it includes details such as pricing and images. Tapping on the product card allows redditors to see more details about the product, where they can then link out to select retailers, learn more, or make a purchase. For the initial test, queries for consumer electronics will also show product carousels sourced from select Dynamic Product Ads (DPA) partner catalogs.” — We are Testing a New Shopping Product Experience in Search
Assuming a 15% ad load (15% of searches show ads) and conversion and cost-per-click rates below Google averages, I’ve estimated that Search ads could drive at least $100mm in annual revenue by 2028.
While that $100mm estimate isn’t much next to Reddit’s advertising revenue ($600mm+ this quarter alone), every little bit helps. Longer-term these search ads could scale to be a really material driver of topline performance.
Weekly Actives vs. Daily Actives: Scrollers Vs. Searchers
Previously Reddit’s management have separated the userbase between scrollers vs. searchers. Scrollers are logged-in users that engage more, ‘scrolling’ for extended sessions and viewing more ads, whereas searchers are logged-out users that come from Google primarily to search things on Reddit. Reddit continues to adapt monetization to target both of these cohorts.
U.S. logged-out DAUQs (the searcher cohort) grew 12% Y/Y in Q1. Reddit’s management team have stated multiple times that the value of an impression between logged-ins and logged-outs is almost identical; Reddit can still track visits and visit history for logged-out users which gives them plenty of ad targeting data. Most of the monetization gap between logged-in vs. logged-out comes from engagement, logged-ins being the scrollers that engage more and see more ads. However, daily logged-out users are still visiting Reddit and seeing at least a few ads, and it expands Reddit’s topline funnel to (hopefully) eventually see more daily logged-in users.
Speaking of, U.S. logged-in DAUQs grew 1% Y/Y — obviously not a ton of growth but it is a very marginal all-time high for that metric. Reddit’s CEO Steve Huffman spent a lot of time on the Q1 call laying out Reddit’s primary goal going forward, which is to double U.S. daily actives to 100 million. Reddit already has 200 million U.S. weekly actives in the funnel, so we know where these new daily actives will come from, and they’re already familiar with Reddit. Reddit just needs to actually hook them in and get them to stay on the platform.
Reddit’s CEO outlined the trialing of smoother logins (including potential 3rd party human verification services) and personalizing the feed for logged-outs to drive further engagement from that cohort without them needing to log in. As the logged-out searcher cohort continues to grow relative to logged-in scrollers, search ads and shopping-in-app will become more important to drive revenue over time.
As CEO Huffman said, and every Google bull already knows, search ads are kind of just the best business model that exists. Reddit is already a search platform in itself seeing almost 100 million weekly searches and now, they have plenty of opportunity to monetize that functionality in the years to come.
Just as an example, here’s some search suggestions Reddit has given me based on my interests from a web browser where I’m not currently logged in. Reddit still knows I play a lot of Cyberpunk 2077 and I’m interested in stocks, supporting the continued monetization of logged-out users.
On International Growth
During Q1 Reddit grew international daily users by 26% (logged-in by 12% and logged-out by 38%), reaching 73 million international daily actives. Combined with international ARPU expansion, international revenue grew 76% Y/Y and represented 21% of total revenue during the quarter.
You know, 21% of total sales isn’t a lot, but when you can grow that segment 76% it becomes really meaningful. CEO Steve Huffman broke this down at the same Deutsche Bank TMT conference I quoted above, scaled social networks like Twitter and Instagram see 80-90% of total users arrive from international geographies. Today, Reddit’s daily active userbase is only 58% international. Though ARPU rates are significantly lower, the user TAM from international geographies vastly exceeds that within the U.S.
Thanks to advances in AI-powered human-level live translation (now available in 30 languages) and direct outreach programs within target countries like France, Reddit has begun to really take off internationally. International geographies with live translation enabled are growing 30-40% faster than other countries. Reddit’s goal here is to seed international markets with translated posts from English to get things going, but eventually the idea is that each international geography can stand on it’s own, with posts being created and consumed naturally by users within those geographies. If you want to see this progress in action, just go take a look at r/UnitedKingdom or r/France.
Anyways, the main focus of this section is to emphasize that Reddit can grow EBIT >20% annually purely from international growth, given daily users up 26% and ARPU up 51% to $2.02 sending international revenue up 76% Y/Y in Q1. While ARPU still has a long road to catch up to U.S. ARPU, the user TAM internationally is massive. It is my belief that long-tail growth in international markets can support Reddit’s overall revenue and EBIT growth in the 20% range for years and years to come, even after growth in the U.S. eventually slows down.
Overall Thoughts
Reddit remains an absolutely killer business and it has been one of my absolute favorites to cover here. The company is incredibly capital-light, can scale very profitably at 60%+ incremental EBIT margins, and they have a long growth runway ahead of them. The executive team remains focused and they’re executing exceptionally well. The valuation remains undemanding considering the massive long-run growth potential of this business. Another plus is that it’s fairly easy to channel check Reddit’s progress across various feature launches by just going to the website itself.
That’s all for now. Happy investing everyone, whether you own some Reddit or anything else!
Great overview Jack, and very well explained regarding Reddit's progress on new ad formats!