As expected, Reddit (NASDAQ:RDDT) of flooding its platform’s comments section with ads is having the desired effect. Advertising revenue increased 42% to $253.1 million in the second quarter. While that’s nothing compared to rivals like Facebook, which brought in over $38 billion in ad revenue, it’s a significant improvement that helped bolster Reddit’s finances for the period.

I have previously pointed out that the plan would likely result in increased revenue for the social media site.

“While Reddit’s plan might initially lead to higher revenue as advertisers try to reach new and different audiences, with more ads comes an increased risk that users will ignore them,” I wrote, noting that the long-term impact could be negative.

There could be a backlash among Reddit’s notoriously fickle users. Plus, Reddit has to spend a lot of money to acquire new users. Degrading the user experience with more ad placements could make it harder – and more expensive – to acquire new users.

The short-term effect is positive and Reddit’s shares rose 8% after the earnings release. In the longer term, this could be negative, so I think investors should take their profits and sell.

The rising tide lifts Reddit’s boat

Reddit reported a 54% increase in quarterly sales to $281.2 million with a 57% increase in weekly active users. The social media site now has over 342 million users. The majority of Reddit’s revenue comes from advertising, 90%. This is the case with most social media platforms that need to monetize their users.

The website continues to make losses but has managed to narrow them significantly, reporting a net loss of $10.1 million, a significant improvement from the $41.1 million it lost in the same quarter last year.

Adjusted EBITDA was $39.5 million, compared to an adjusted loss of $35.4 million a year ago. However, most of that gain came from the elimination of stock-based compensation for executives. Executives were awarded over $66 million this quarter, compared to just $10 million a year ago.

Still, it does show the benefit of generating more advertising revenue. Because even though spending rose sharply in the quarter, no doubt due in part to its IPO in March, Reddit was able to offset that increase by selling ads.

A tsunami of advertising

The presence of ads will increase significantly in the future. Reddit will further integrate advertising within its unique communities to enable more targeted marketing. It usually makes sense to place ads that are relevant to the communities that see them.

Reddit also has the opportunity to increase the number of ads in search. The company has announced the acquisition of Memorable AI to help marketers and advertisers place ads on the site. This will also help in expanding search capabilities across the platform.

“Many users are literally typing what they are interested in into a field,” CEO Steve Huffman told analysts during the quarterly earnings call.

But what matters most to Reddit is the quality of its users, and that is its biggest weakness.

A lack of commitment

As fast as Reddit is growing, it isn’t attracting users who are engaging with the site. Reddit admits that its business is built on and relies on user interaction. But fewer and fewer users of the site are actually logging on.

While the average daily user count increased by 51% during this period, the number of those actually logging into Reddit continues to decline, with only 46% of users logging in, compared to 53% last year. This is also a drop from the first quarter, when 48% logged in.

Logins are essential because without logins, users cannot comment or create posts. This means that a growing number of users are just skimming the site and not engaging with it. This means its value to advertisers is reduced.

The conclusion on Reddit shares

This suggests that while Reddit can make more revenue by placing more advertising on the site, its core users may not like it. And since an increasingly smaller percentage of them are actually interacting with the Reddit platform, it could have an overall negative impact on the stock.

At the time of publication, Rich Duprey did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s disclosure policies.

At the time of publication, the editor in charge did not hold any positions (either directly or indirectly) in the securities mentioned in this article.