Reddit’s stock plunged about 28% on Friday, October 30, after the company said its U.S. audience is shrinking due to Google’s AI search features.
The sell-off came even though third-quarter revenue jumped 53% to $895 million. U.S. daily users fell to 50.7 million, down 2.5 million from the prior quarter, and CEO Steve Huffman said search referrals dropped by more than 1 million a week in October.
Shares, which closed at $129.60 on October 29, traded below their 52-week low of $119.27, changing hands at $91 as of 1 pm EDT. For investors who bought Reddit as an AI winner, the message is that the same technology is now taking away the traffic that feeds the business.
Reddit is tied deeply to Google
Reddit runs the discussion forums where users post questions, advice and opinions, and it makes money mainly from advertising.
Much of its audience arrives from Google searches, which is why search changes matter so much. The stock has been popular with retail investors, but its data is also valuable to AI companies.
In 2024, Reddit inked deals with Google and OpenAI, allowing their respective Gemini and ChatGPT large language models to train on Reddit content in exchange for $60 million and $70 million per year, respectively.
Related: Googling for Reddit answers is about to get harder
Deals like that have supported revenue, but concern is that AI overviews are reducing traffic to Reddit by more than the company is pocketing from its AI deals.
Reddit reports “daily active uniques,” or DAUq, split between logged-in users, who tend to be more engaged, and logged-out users, who often arrive from search and see fewer ads and less engagement. That split is the heart of today’s drop.
In Q3, global DAUq rose 12% year-over-year to 130.3 million. However, U.S. DAUq fell 1% year-over-year, as a 4% dip in logged-out users overwhelmed a 1% increase in logged-in users.
“Google has really shifted in their relationship with the rest of the Internet,” said CEO Steve Huffman on Reddit’s earnings call. “People still want Reddit. It’s just Google is not sending them to Reddit the way they used to.”
Reddit quarter was far from a disaster, but worries remain
Reddit revenue in the third quarter rose a more than healthy 53% to $895 million and while DAUq saw headwinds, U.S. revenue was still up 50% to $719 million.
As a result, Reddit’s profit improved, with diluted EPS clocking in at $1.40, above Wall Street estimates of $1.33.
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Those are healthy figures, but the worry over DAUq trumped them, particularly because user engagement fell sequentially. U.S. daily users fell 4.7% from the second quarter, and again, logged-out users were to blame, given they slipped 9%.
Management didn’t offer a convincing outlook that things would improve, either, given guidance for the fourth quarter was for revenue between $1 billion and $1.03 billion, below analysts’ $1.045 billion consensus outlook.
“The reality is the AI Mode does not drive traffic, not for us and not to anybody as far as I know,” said Huffman. “It used to be a traffic driver. Now it’s not.”
Q4 daily users could fall by a “low double-digit percentage” if Google’s AI Overviews and AI Mode trends continue.
Wall Street issues a glum verdict on Reddit stock
JP Morgan cut its Reddit stock price target to $150 from $185, citing search traffic headwinds, according to TheFly. com.
Similar verdicts were issued by other analysts, including Goldman Sachs, which lowered its Reddit price target to $140 from $215 because of weaker search referrals and declines in traffic from logged-out users.
Reddit isn’t ignoring the logged-out user drop, but COO Jen Wong did point out that 80% of monetization comes from logged-in and app users, making them more important.
From here, the key will be whether U.S. logged-in users hold above 23.4 million and whether Q4 revenue lands at or above $1.0B, the low end of guidance, when Reddit reports early next year. Also watch Google’s AI search rollout, as it could continue to soften Reddit traffic, and Reddit’s tests of logged-in-only access — a move it hopes can shore up its user base.
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