Word-of-Mouth Winners: 2 Stocks Growing Without Big Ad Budgets

Key Points

• While advertising spending can be a big drag on some firms' expenses, others are able to minimize this spending and still grow quickly.
• Network effects are specific customer bases that can help companies achieve this.
• A social media company and a defense company stand out for their prowess in their efficient ad spending.

For many businesses, advertising is absolutely essential to attracting new customers and growing. However, advertising can also be a massive expense. For example, in the last 12 months, the Coca-Cola Company NYSE: KO spent nearly $5 billion on advertising, which is equal to around 11% of the company’s total revenues. However, some companies are able to save significantly on this cost.

This can be due to the nature of their products and customer base. Some products inherently can take advantage of word-of-mouth publicity, where word of their products naturally spreads through users engaging with them. Here are two stocks excelling in this area. Over the past 12 months, their advertising spending accounted for less than 1% of total revenue. All metrics are based on data as of the March 19 close unless otherwise noted.

Reddit: Network Effects Keep Ad-Spend Low as Users Grow

First up is a firm that exemplifies perfectly the idea of word of mouth, Reddit NYSE: RDDT. The online discussion board uses a form of crowdsourcing, relying on its users to post and discuss interesting content. Over the last 12 months, Reddit has spent just $9 million on advertising, accounting for just 0.7% of its $1.3 billion in revenue over the period. As the platform has grown, the value to users has increased, making users inherently attracted to it.

This phenomenon is often called a network effect. Demonstrating its network effect is the fact that although the firm spent relatively little on advertising, it was able to increase its Daily Active Uniques (DAUq) by 39%. DAUq are unique users who have visited a Reddit page at least once a day. 

Further evidencing the company’s network effect is that its user growth rate has actually increased while ad spending is down. In 2022, the company grew its DAUq by just 7% despite spending over $34 million on advertising. Thus, the firm only achieved 0.2% user growth for every $1 million spent on ads in 2022. In 2024, that figure was over 4.3%, a nearly 21-times increase in ad spend efficiency.

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Another example shows how Reddit has used ad spending very efficiently in the past. Reddit famously bought just a five-second commercial in the 2021 Super Bowl broadcast. Despite the ad being so short, Northwestern University’s Kellogg School Super Bowl Advertising Review named it one of the most effective. It ranked as the number one searched Super Bowl ad on Google and increased Reddit’s traffic by 25%. This showed Reddit’s highly effective advertising ability even as it spent far less than other firms.

Axon: Law Enforcement Collaboration Creates Natural Advertising

Another firm spending very little on advertising is Axon Enterprise NASDAQ: AXON. Over the last 12 months, the industrials stock spent just $4.4 million on advertising, accounting for just 0.2% of its total revenue. Despite this, the company grew revenues by over 33% in 2024. The company’s main customer group, law enforcement, contributes significantly to its ability to do this.

Law enforcement agencies often need to work together closely in order to catch criminals. So, it makes sense that word of popular products like Axon's would spread naturally. Additionally, Axon’s software makes it easy for officers to share evidence with other departments. This spreads word of Axon’s software when other departments see evidence shared using the technology.

One caveat to Axon’s advertising spend is that it still needs to employ a significant sales staff. One could argue that it acts in place of the company’s need for advertising. Still, the company’s sales and marketing expenses came in at just $109 million, representing just over 5% of revenue. That is relatively low. Axon sells a mixture of software, weapons, and other hardware. Thus, it makes sense to compare them to both types of firms.

Software companies can see these sales and marketing costs make up 20% or significantly more of their revenue. Software accounted for 40% of Axon’s total revenue last quarter. This makes the company’s low sales and marketing expenditure particularly impressive. McKinsey & Company states that high-growth software companies can see these expenses account for 50% or more of revenue.

Axon still has an advantage over a firm that sells weapons, Smith & Wesson Brands NASDAQ: SWBI. In its latest annual filing, Smith & Wesson had selling, marketing, and distribution expenses equal to nearly 8% of revenue.