Reddit entered the S&P 500. After this year's slump, does it still have room to grow?
Reddit $RDDT entered the S&P 500 index on August 18, just about two and a half years after going public. On the news, the stock jumped over 11%, because index-tracking funds need to buy around 16.7 million shares according to JPMorgan's estimate, nearly three times the average daily volume. But the real paradox lies elsewhere. The company is entering the world's most-watched index at a time when its stock is more than 40% below the record from autumn 2025 and is down 31% since the start of the year. And that's despite Reddit doubling both net income and free cash flow in the second quarter. So the market isn't questioning whether Reddit is profitable. It's questioning whether it's running out of fuel for further user growth.
Key points
The operating leverage is real. Profit and free cash flow are growing many times faster than revenue, net margin exceeds 31%, and the company holds $2.8 billion in cash with virtually no debt.
The engine is advertising, not AI data. Ad revenue of $762 million (+64%) drives the entire business, while data licensing is still just $43 million. Data is an option for the future, not a current revenue source.
The core risk is the American user and Google. The most valuable U.S. users declined quarter-over-quarter, and a significant portion of reach depends on volatile clicks from the search engine, which Reddit does not control.
A drop is not automatically a bargain. At about 27 times expected adjusted earnings, an investor is paying for growth that, according to the company's own outlook, is slowing from 61% to 48%. Consensus targets about 40% higher, but the spread of estimates ($130 to $300) is huge.
S&P 500 inclusion is a temporary catalyst. Forced buying by index funds is one-off and historically fades; long-term value will be determined by fundamentals, not index membership.
Operating leverage the market underestimated: profit growing three times faster than revenue
The numbers for the quarter ending June 30 look almost unreal. Revenue rose 61% to $805 million, marking the eighth straight quarter of over 60% growth. But net income jumped 184% to $253 million and adjusted EBITDA rose 106% to $343 million. So profitability metrics are growing many times faster than revenue itself, which is textbook operating leverage.
The mechanics are simple. Reddit has a gross margin of 91.3%, so the cost of running the platform eats only a small part of each revenue dollar. Once the company stopped sharply increasing spending on development and marketing, revenue began to grow much faster than costs, and the adjusted EBITDA margin widened by about nine percentage points year-over-year. A platform that reported a loss of $484 million in 2024 has become a business with a net margin over 31% and an adjusted EBITDA margin over 42%. 2025 was the first full year in which Reddit reported a positive accounting profit ($530 million on revenue of $2.2 billion).
Metric (Q2) | 2026 | 2025 | Change |
|---|---|---|---|
Revenue | $805 million | $500 million | +61% |
Net income | $253 million | $89 million | +184% |
Adjusted EBITDA | $343 million | $167 million | +106% |
Free cash flow | $261 million | $111 million | +135% |
Net margin | 31.4% | 17.8% | +13.6 pp |
Gross margin | 91.3% | 90.8% | +0.5 pp |
Note: quarter ending June 30. Source: Reddit, Q2 2026 results.
Cash is even more telling. Free cash flow jumped 135% to $261 million, and over the last twelve months operating cash flow exceeded one billion dollars for the first time. Capital expenditures are negligible ($1 million per quarter), so almost all profit turns into free cash. At the end of June, the company held $2.8 billion in cash and equivalents and virtually no debt.