Reddit skyrockets 42% on strong earnings beat and AI-driven growth

• Reddit stock surged 42% Wednesday to trade at a record high after reporting a strong earnings beat.
• Reddit's revenue jumped 68% from a year ago, partly helped by licensing deals with OpenAI and Google.

Reddit stock soared 42% to close at an all-time high of $116.03 per share on Wednesday afternoon after the company reported a strong earnings beat.

A few months ago, investors appeared wary of Reddit's ability to compete on AI. Now, the platform's AI licensing deals are helping fuel its biggest quarterly revenue growth in two years and driving its stock to new records.

On Tuesday, the company reported net income of $29.9 million, flying past expectations of an $8.8 million loss. It marks just the third profitable quarter for the company.

Reddit's revenue jumped 68% from a year ago to $348.4 million. Part of that huge jump comes from its strong suite of licensing deals with OpenAI and Google, which are reflected in the $33.2 million of "other revenue" for the third quarter.

That revenue category grew 547% year over year and now accounts for over 9% of the company's overall revenue, up from less than 1% last year.

The company's licensing deals allow AI giants to train their models on the platform, which has become an increasingly competitive landscape. CEO Steve Huffman previously said Reddit is well-positioned amid an intense "arms race" for AI training.

The company is also innovating in AI via language translation, which it's piloting in French, Huffman said during the earnings call. The move has helped drive more users to the site, he said.

"This quarter, machine translation drove four times more users than last quarter, and based on the success we've seen so far, we plan to expand machine translation to over 30 countries through 2025," Huffman added.

The company added over 24 million daily users in the first three quarters of the year, already surging past the 15.6 million added in total last year, which has provided a huge boost to its ad business, too. Advertising revenue is forecast to surpass $1 billion for the year for the first time.

Analysts say the company's ad and AI innovation are reasons for continued optimism on the stock.

"Revenue beat street expectations by 11%, dispelling fears around user growth sustainability, while displaying improved monetization via ad product innovation and AI-driven enhancements," Deutsche Bank analysts said in a Wednesday note.

"Looking forward, Reddit is expected to re-launch its Search tool in the coming quarters, which given the success of competing Gen AI-driven search tools, could drive another lever in monetization growth," they added, raising their price target on the stock from $85 to $115.

Analysts are now expecting $113 million in profits next year, up from previous consensus estimates of just $17.5 million, according to FactSet data.