RDDT — Earnings Review Q4 FY25 (WSM)

Date: 2026-02-22 Quarter: Q4 FY25 (Dec-25) Position: Long 4.6% Market cap: ~$28.7B | Run-rate P/S: ~9.9x | Revenue growth: 70% YoY

Verdict

Reddit is printing money. $726M Q4 revenue (+70% YoY, +24% QoQ) beat $665M consensus by $61M — a 9.2% revenue beat is massive for a company this size. EPS of $1.24 crushed $0.94 estimate by 32%. Adj EBITDA margin hit 45%. FCF is $264M in a single quarter (36% margin). The balance sheet has $2.5B cash and zero debt. I'm holding my 4.6% position and watching for opportunity to add.

The YoY growth rate peaked at 78% in Q2 FY25 and has pulled back to 70% in Q4, with Q1 FY26 guided at 54%. That's deceleration by my rule — two consecutive quarters down from peak. BUT the QoQ comparison tells a different story: Q4 FY25 was +24.1% QoQ, which is FASTER than Q4 FY24 (+22.8% QoQ). Same-quarter seasonality is clean or improving. The deceleration is YoY base-effect noise from a monster Q2 FY25 (+27% QoQ). The underlying momentum is intact.

The real thesis is ARPU. US ARPU grew 164% YoY to $10.79. Active advertisers grew 75% YoY — faster than revenue (70% YoY). The ad platform is working. International (57% of users, ~20% of revenue) is the optionality. Intl ARPU reversed to +25.5% QoQ in Q4 after being negative. That's the inflection I'm watching.

Action: Hold. No trim, no add yet. Wait for Q1 FY26 print.

The Numbers

*Q1 FY24 EPS distorted by $1.1B one-time IPO SBC charge. Not representative.

QoQ Trajectory — The Primary Signal

My framework: QoQ is primary. Compare each quarter's QoQ to the SAME quarter in prior years.

Q4 FY25 QoQ (+24.1%) beats Q4 FY24 QoQ (+22.8%). That's what matters. Q3 FY25 was the weak one (-6.9pp vs same Q prior year). Q4 rebounds cleanly. Mixed picture — not the clean acceleration I want, but not broken.

YoY trajectory: 48% → 54% → 68% → 71% → 62% → 78% → 68% → 70%. Peaked at 78%. Now 70%. Two Qs off peak. By my rule, this is technically deceleration territory. However: the 78% was distorted by Q2 FY25's exceptional +27% QoQ sequential (huge advertiser demand spike). The underlying trend is 68-71% YoY in Q3/Q4, which is stable. I'm not selling on this decel — the data doesn't support thesis breakage.

Revenue growth trajectory: Stable-to-slightly-decelerating. Not broken.

Leading Indicators

The bullish divergence: Active advertisers growing faster than revenue (+75% vs +70%). More demand than supply implies pricing power. That's the foundation of continued ARPU expansion.

The key observation on Intl: International users are 57% of DAUq and ~20% of revenue. US ARPU is $10.79. Intl ARPU is $2.31. That's a 4.7x gap. If Reddit closes even 20-30% of that gap, the revenue uplift is enormous. Q4 shows Intl ARPU inflecting +25.5% QoQ after being negative. This is the most important metric to track in FY26.

The concern on US DAUq: -11.6% YoY. US is losing daily active users but monetising them far better. That's a trade-off. As long as ARPU growth outpaces the DAUq decline, revenue holds. But if ARPU growth plateaus while US users keep leaving, it's a problem. I don't think ARPU plateaus yet — Meta is $50+ ARPU, Reddit is $10.79. Reddit is still at the beginning of the S-curve on monetisation.

Margin Story

Adj EBITDA margin trajectory: 4% → 14% → 27% → 36% → 29% → 33% → 40% → 45%.

This is exceptional. Gross margin is locked in at 90-92% [GAAP] — best-in-class ad platform economics. The incremental revenue flows through at very high rates. Q4's 45% Adj EBITDA margin exceeded the prior guidance range of 36-40% by 500bps. Management was lowballing and surprised to the upside.

FCF margin trajectory: 12% → 10% → 20% → 21% → 32% → 22% → 31% → 36%. FY25 FCF of 684MmorethantripledFY24^′s 216M. FCF/EBITDA conversion is strong (Q4: $264M FCF / $327M EBITDA = 81%). The business is legitimately cash generative.

GAAP net margin: 35% in Q4. EPS $1.24. This is a profitable business. No GAAP/non-GAAP games.

SBC concern: "High teens" guidance for FY26 = 17-19% of revenue. At 2.4Brun − rate, that^′s 420M annually in SBC. Heavy. But management has committed to keeping dilution at the low end of 1-3% — so they're managing share count. Worth monitoring but not a thesis-breaker at this growth rate.

Guidance Analysis

Pattern: Reddit guides conservatively and beats. Q4 beat its own prior guide by 10%. The Q1 FY26 guide of $600M midpoint (+54% YoY) looks soft on first glance. But $600M vs $726M in Q4 = -17% QoQ, which is normal Q1 seasonality. Compare: Q1 FY25 was $392M vs Q4 FY24 $428M = -8% QoQ. Hmm, Q1 FY26 guide implies steeper seasonality (-17% vs -8%). That's the bear case — either management is sandbagging more than usual, or Q1 ad market is genuinely softer.

My bet: they beat $605M. If they print 640M+, that^′s63600M), growth decelerates to 53% YoY — still good, but I'll reassess the trajectory.

Wide EBITDA guide ($110-220M) is unusual. That range is enormous. It tells me management genuinely doesn't know how Q1 will play out — probably waiting to see how ad spend crystallises after a volatile Q4 period. Midpoint $165M implies ~27% EBITDA margin, a big step down from Q4's 45%. Some is seasonal (Q1 is always lower), some is investment. Watch this closely.

Valuation (Run-Rate Only — WSM Rule)

Jamin Ball SaaS context: For software growing 70% YoY, median EV/NTM Rev is typically 20-30x. Reddit at 9.9x run-rate P/S is cheap for this growth rate. Growth-adjusted (P/S ÷ growth rate): 9.9 ÷ 70 = 0.14x. That's a bargain. Even if growth decelerates to 50% over the next 4 quarters, 9.9x P/S on a 50% grower with 45% EBITDA margins and 36% FCF margins is very attractive.

P/FCF of 27.2x on run-rate FCF of $1.06B. FCF yield of 3.7%. For a 70% revenue grower compounding FCF, this is not expensive.

Run-rate P/E of 30.3x. For a company growing earnings at 100%+ (Q4 GAAP EPS was $1.24 vs $0.36 in Q4 FY24 = 244% growth). PEG of 0.30 — cheap.

Valuation verdict: Cheap to fair. The market is pricing in deceleration but not the upside optionality.

Thesis Assessment

What I believed going in:

• Reddit's ad platform is at an early inflection point post-IPO
• ARPU expansion would outpace modest user growth
• International monetization is the medium-term optionality
• The company would prove operating leverage at scale

What Q4 showed:

• ✓ Ad platform inflecting: $690M ad revenue +92% YoY
• ✓ ARPU expansion exceeding expectations: $5.98 blended (+42%), US $10.79 (+164%)
• ✓ Operating leverage: 45% Adj EBITDA margin, 36% FCF margin
• ✓ International beginning to work: Intl ARPU +25.5% QoQ
• ✓ No debt, $2.5B cash, $1B buyback
• ⚠ US DAUq -11.6% YoY — users declining, not growing
• ⚠ Q1 guide implies deceleration to 54% YoY — watching

Thesis: Intact and strengthening. The monetization story is executing ahead of schedule. The only legitimate risk is US user stagnation — and even there, the ARPU trajectory makes it manageable unless US users decline sharply.

Management Assessment

Steve Huffman (CEO): "Most human place on the Internet" narrative. This isn't empty branding — Reddit's community-driven content is genuinely differentiated from AI-generated noise. The Google algo tailwind is real (Reddit search results appear prominently post-2024 algo update). I trust the narrative because the data backs it.

Management credibility: Consistently guided conservatively and beaten. Q4 beat their own $655-665M guide by 10%. EPS beat of 32%. The $1B buyback announcement with $2.5B cash is a signal of confidence. SBC commitment ("high teens") is higher than I'd like but manageable.

Maria Angella Dew Smith as new CPO: New appointment. Reddit has historically had weak product execution. If she drives Reddit Max to GA and accelerates SMB adoption, it's additive. Monitoring.

Red flag check: None. No management credibility issues. Promises tracked are being kept.

Risks to Thesis

1. US DAUq decline. -11.6% YoY. If this accelerates, ARPU growth alone can't compensate forever. The bear case is US usage peak.
2. ARPU ceiling. US ARPU $10.79 growing 164% YoY. Mathematically this rate must slow. The question is where it stabilises. Meta at $50+ shows the runway, but Reddit's community-based browsing is less engaging per minute than Meta's feed. Likely stabilises $20-30 range medium-term, not $50.
3. Google dependency. Traffic spike from Google's 2024 algo change. Any reversal = headwind. Not under Reddit's control.
4. Q1 FY26 softer than expected. Wide EBITDA guide signals uncertainty. If Q1 misses AND lowers Q2, thesis weakens fast. I'll sell without hesitation if that happens.
5. Content authenticity. Reddit's moat is human discussion. AI bots are a real threat to content quality. Management hasn't quantified this risk.

Conclusion

Eish, where was the controversy? This was an exceptional quarter. $726M revenue, 45% EBITDA margin, 264MFCF—thebusinessiscompoundingbeautifully.Thestockpulledback 8600M midpoint vs ~$620M+ street expectations). That's the entry point, not the exit.

At 9.9x run-rate P/S and 27x run-rate P/FCF for a 70% revenue grower with 92% gross margins and 36% FCF margins, Reddit is cheap. The international ARPU inflection in Q4 (+25.5% QoQ) is the emerging catalyst — if Intl monetization approaches even half of US levels over the next 2-3 years, the revenue uplift is enormous.

My position: 4.6%. I'd like to add but I'm nearly fully deployed. I'll wait for Q1 FY26 earnings. If they beat the $600M guide and international ARPU continues trending, I'll trim a smaller position to fund an add.

Action: Hold 4.6%. Watchlist for add post Q1 FY26 earnings beat.

→ Q1 FY26 to watch: Revenue >620M = beatnarrativealive.IntlARPU>2.50 = international inflection confirmed. EBITDA margin >30% = operating leverage sustained.

-wsm (Long RDDT, 4.6%)