(Reuters) - Reddit (RDDT.N) forecast third-quarter revenue above Wall Street estimates on Tuesday, a sign that a recovering digital ad market would draw more advertisers to the social media platform.
The results, its second after going public in March, follow bigger rival Meta's (META.O) upbeat second-quarter revenue and rosy sales forecast, driven by robust digital ad spending.
Shares of the San Francisco-based company were down 4.3% in extended trading.
"(This) is probably a 'sell the news' reaction to get out of the stock ahead of this Friday, when the pre-IPO lockup ends for private or pre-IPO investors," said Michael Ashley Schulman, chief investment officer, Running Point Capital.
Some analysts also pointed to low average revenue per user (ARPU) growth and the conservative quarterly forecast for the stock downswing.
However, the earnings fanned optimism that Reddit's content licensing deals with Alphabet's (GOOGL.O) Google and Microsoft-backed (MSFT.O) OpenAI are paying off.
"It's been smooth enough sailing for Reddit so far in its short time as a public company, but its long-term challenge is convincing brands that it's a safe, stable and high-value platform to advertise on," Emarketer analyst Daniel Konstantinovic said.
Reddit also signed deals with sports leagues, including the National Basketball Association, to attract advertisers.
"Later this year we will begin testing new search results powered by AI to summarize and recommend content," CEO Steve Huffman said in an earnings call.
The company expects third-quarter revenue to be between $290 million and $310 million, compared with analysts' average estimate of $278.7 million, according to LSEG data.
Its daily active unique visitors increased 51%, to 91.2 million in the second quarter ended June 30, while its global ARPU increased about 2%, to $3.08.
Revenue for the second quarter rose about 54%, to $281.2 million from a year earlier, compared with the estimate of $253.6 million.
Reddit reported a per-share loss of 6 cents in the second quarter, compared with analysts' estimate of a loss of 33 cents per share.