Reddit's advertising business exploded in the third quarter, albeit from a small base

Reddit is riding high with better-than-expected revenue growth.

The company reported just over $348 million in third-quarter revenue, up 68% year over year, beating estimates, while advertising revenue for the quarter was $315.1 million, up 56% compared to the previous year.

Reddit's stock price rose over 20% in after-hours trading.

COO Jen Wong cited an increase in served impressions, more efficient ad utilization and higher ad density in conversation threads as key drivers of ad revenue growth. Ad prices remained consistent compared to the third quarter of 2023, she said.

It's worth nothing that advertising revenue rose in the quarter, even if some of Reddit's shiny new advertising products, including generative AI creative tools and in-comment ads, aren't fully integrated into the platform, Wong said.

But while Reddit appears to have a solid foundation for future growth, it still has a long way to go before its ad business can catch up with its social media rivals.

Audience and sales growth

Comparisons with other platforms aside, the third quarter was full of good news for Reddit investors.

Reddit's average daily unique user count was 97.2 million in the quarter, up 47% year-over-year, with strong growth in both the U.S. and international markets. Average revenue per user was $3.58, up 14% year-over-year.

Reddit also hit 100 million daily uniques several times during the quarter, which CEO Steve Huffman called a “long-time milestone.”

And here's an interesting tidbit: “Reddit” was the sixth most Googled word in the US this quarter.

In terms of demand, performance revenue from mid- and lower-funnel campaigns accounted for 60% of Reddit's advertising revenue in the third quarter and drove more than half of its revenue growth, Wong said.

Spending by mid-market and SMB advertisers increased 80% year-over-year, with SMB spending in particular doubling year-over-year.

The number of ad-driven clicks also doubled this quarter, Wong said.

New Conversion API (CAPI) integrations were also introduced in the third quarter, with CAPI adoption also doubling compared to the previous quarter and conversions increasing by 50% compared to the second quarter.

New ad products

Looking forward, Reddit is focused on launching new search-based advertising products, Huffman said.

However, the most immediate way for Reddit to monetize its audience growth is to further increase the ad load in the comment threads beneath a Redditor's original post, known as conversation pages. According to Huffman, views on conversation sites topped 90 billion in the third quarter, up 40% year over year.

And there's even more room to fill these pages with ads. Reddit first launched a conversation ad unit in 2021, placing a banner ad directly below the original post in a thread. At this year's Cannes Lions Festival, Reddit announced plans to introduce even more ads between comments.

It's unclear how many of these in-comment ads Reddit will add to conversation pages to maximize revenue. “Ad load is not a lever we focus on,” Wong said.

Demand for conversation and in-comment ads remains lower than in-feed ads, but it is growing, she added, although it will take time for the rollout of the new in-comment units to gain traction This tends to be the case with newer displays.

But the company has a few tricks up its sleeve to drive adoption.

For example, multi-placement optimization was recently introduced, which automatically controls the advertiser's chosen outcome by adjusting where ads appear in the feed and comment threads. According to Wong, more than 90% of lower funnel campaigns now use this feature.

The introduction of multi-placement optimization is important as performance marketers focus more on results and less on the exact placements they buy, Wong said. Automation spreads demand across all inventory types and could encourage marketers to buy more conversational and in-comment inventory if they see those units performing well, she added.

And then there's the plan to build a purchasing platform for performance marketers, but that's a longer-term priority, Wong said. This requires “the incorporation of catalogs, proprietary machine learning models and more complicated measurements,” she said. “We’re building that capability, but it’s a longer journey.”

And of course, Reddit has plans to capitalize on the generative AI craze. It recently launched an automated headline generator that makes sponsored posts feel more like they were written by community members. This solution is based on technology Reddit acquired from Memorable AI, a company that specializes in understanding how creative design drives performance.

The next step for this technology is to integrate these generative AI capabilities into Reddit's ad tech stack, rather than offering the feature as a standalone tool. “We see a very extensive and exciting roadmap in terms of advertising creation and genetic AI,” said Wong.