Software has been heavily punished this year, continually roiling over a sea of AI fears. Seemingly every new frontier AI announcement that advances capabilities into a new area (autonomous agents, virtual world generation, or honing AIs more deeply into cybersecurity, development, legal, HR, and other business needs) has been fanning wave after wave of panic selling.

As I have noted before, the market is straddling an extremely odd dichotomy. The market is simultaneously saying that all enterprise software is going to be disrupted by AI, and that hyperscalers and neoclouds are spending too much capex on AI right now without immediate returns to show for it. Between these extremes, I expect the answer to be in the middle.

While I've highlighted the risk of platforms with per-seat pricing facing headwinds from workforce productivity increases (as well as the shrinking Federal workforce), I believe the majority of B2B enterprise SaaS platforms that I follow have carved out a defensible position. The market's worries of a coming massive wave of disruption in enterprise software are way overblown. I believe that the next-gen security platforms, consumption-based data platforms, and full-stack hardware-to-software platforms that I tend to cover will continue to maintain their moats and stickiness – and could even strengthen those moats through thoughtful in-platform AI capabilities or becoming vital infrastructure across AI adoption waves. I have minimal worries of disruption hitting Cloudflare, Rubik, Axon, Samsara, Snowflake, Databricks, CrowdStrike, or GitLab – and, in fact, increasing AI adoption seem likely to accelerate demand for their platforms. On the other side, we have NVIDIA, hyperscalers, and neoclouds that will be powering all of these emerging AI workloads from here.

Lately, I have been looking at some of the heavily punished names in software, including some advertising-driven cash cows like AppLovin and Reddit. As of today, Reddit is down 37% YTD, and AppLovin is down 30%. Both of these companies have had strong performance over the past year as they have strengthened their advertising plays.

Let's look deeper at what makes Reddit tick. I believe it has a strong value prop from its community-driven networking effects, and is proving very adept at monetizing its users through advertising.  This first part will cover their unique stance, and part 2 will cover the financials, audience makeup, AI moves, and platform shifts.

  • Reddit has become the de facto platform for Internet users to find communities of other like-minded people, that gather around their topics of interest. This has generated a massive body of human-derived content (posts, comments, feeds, likes) over the past decade+ that is full of opinions, views, trends, advice, and humor.
  • It is not only human-derived content, but is it also curated by humans. While Reddit has overarching rules, individual community groups have their own set of rules with volunteer moderators tasked with enforcing them.
  • Their audience tends to be a more Internet-aware, technology-forward younger crowd. While surveys show them as being a 60/40 male-to-female mix, that is more like 50/50 in their most mature US and UK markets.
  • Reddit mgmt has gotten rid of distractions and is heads-down on maximizing the ad revenue opportunity. I see a number of levers they can pull to continue their hypergrowth, and mgmt appears to be clearly focused on the right areas.
  • The biggest lever is improving content discovery and user engagement – both of which drive up session length (page views). When magnified by rising active users (DAUq/WAUq), this all leads to more ad impressions.
  • Mgmt is focused on driving more engagement from all access points, and they are hoping to spur more immediate engagement from new users by retooling their onboarding process & feeds.
  • The other big lever is improving ad performance (targeting) and improving the campaign automation, tooling, and onboarding for advertisers and ecosystem partners. This drives up demand for their ad platform.
  • Their US market is most mature, yet continues to see hypergrowth in ad revenue. Revenue/ARPU growth is clearly outpacing DAUq/WAUq growth.
  • While the International market has a long tail of users and faster-growing revenue, it is less mature and its ARPU trails significantly. This presents a big opportunity to expand user engagement and ad impressions further in international users.
  • They have covered other English-speaking regions (UK, Canada, Australia), and are now leveraging AI (translation) and local teams to expand more deeply into non-English regions. Mgmt has noted strength in France, Brazil, and India of late.
  • They had 2 big partnerships/deals with major AI engines for training data and web search access. The revenue gained is the least important part of this.
  • The market is full of AI worries here, with continual FUD around AI citation mix and DAU weakness (2 of their many levers) – yet ad revenue & ARPU remain in hypergrowth, even in their most mature market (US). This company is firing on all cylinders, which shows it is taking full advantage of its many levers.
  • The coming Q1 is their seasonally weakest quarter in revenue, margins, and KPIs. This, combined with the ongoing AI-killing-software FUD, is likely to present some opportunities.