Reddit shares plunged 30% on Friday, falling to $91.51 per share after the social networking platform issued concerning guidance for the fourth quarter. According to Reuters, the stock hit a low of $89.28 earlier in the day, representing a 29.45% decline that overshadowed the company's stronger-than-expected third-quarter results. The sharp selloff has pushed Reddit's stock down about 44% this year through Thursday's close, highlighting investor concerns about the platform's future growth prospects amid Google's AI-driven search changes. As reported by TIKR, the stock already traded at its lowest forward multiple in a year, too low for a company guiding to about 40% growth. Citizens downgraded Reddit to Market Perform from Market Outperform following the results, citing growing uncertainty around user growth as Google sends less traffic to the platform.
The company forecast fourth-quarter revenue of $1.00 to $1.03 billion, falling below the Bloomberg consensus estimate of $1.05 billion. According to TIKR, this outlook raised concerns about whether Reddit's advertising business can maintain its growth momentum amid changes in online search. The weak revenue forecast prompted analysts to cut their price targets, warning that declining Google Search referrals could threaten Reddit's user growth and future advertising revenue. Reddit's shareholder letter revealed that search referral traffic was "down meaningfully" in the third quarter, "with the decline accelerating later in the quarter." This represents traffic that Alphabet (GOOG) used to send Reddit's way, while Pinterest (PINS:NYSE), which also reported Thursday evening, doesn't seem to have the same problem with its users hitting a record 661 million, up 10%. JPMorgan analysts noted that Google's expansion of AI powered search features, alongside changes to the ranking of machine translated content, had contributed to the decline in search traffic.
Chief Executive Steve Huffman warned that daily active unique visitors could decline by a low double-digit percentage in the current quarter from approximately 130 million if referral traffic continues to weaken. According to Reuters, the warning highlighted how the shift towards AI powered search is disrupting the traditional flow of visitors to websites that have long depended on Google for audience reach. Huffman stated that search engine referrals to Reddit had declined by more than one million on average each week during October. The CEO emphasized that "Google is crawling us as hard as ever," but "the AI mode does not drive traffic, not for us and not to anybody." As reported by TIKR, Alphabet said Google's search query growth was its highest in five years, with Search & other revenue up 12% to $63.4 billion. People are searching more than ever, and more of those searches end on what Reddit's letter calls "an AI-powered destination itself," which is a win for Alphabet and Reddit has to make up the lost traffic through its app.
Despite the weak outlook, Reddit reported third-quarter revenue of $895 million, up 53% year over year and above the Bloomberg consensus estimate of $869.6 million. As reported by LiveMint, net income climbed to $283 million, or $1.40 per diluted share, compared with analyst expectations of $272.6 million. Adjusted EBITDA increased 70% to $402 million, exceeding the $398.5 million estimate. According to TIKR, advertising revenue grew 54% to $847 million, while other revenue, which includes data licensing, rose 35% to $48 million. The company also reported free cash flow nearly doubled to $363 million and bought back $100 million of stock at an average of $149.81 per share. Quarterly revenue has more than doubled since the end of 2024.
Reddit's daily active users in the US declined 2% year over year to 50.7 million, while global daily active users reached 130.3 million, missing expectations. However, international users rose 24% to 79.6 million, and average revenue per user climbed 36% to $6.87, indicating the platform is earning more from each visitor despite US traffic challenges. According to TIKR, the U.S. loss came from logged-out visitors, down 4%, while logged-in U.S. users rose 1%. Reddit says logged-in and app users bring in "over 80% of the monetization." The company announced plans to test a logged-in-only version in select markets outside the US in Q4, which could make it harder for AI companies to scrape Reddit's content while potentially pushing away casual visitors before they become account holders. Citizens analyst Boone highlighted that U.S. logged-out daily active uniques fell 4% year over year, the first annual decline since 2022, noting that "with significant uncertainty around user growth, this puts more pressure on user monetization as we believe shares are now fairly valued." The analyst also flagged risks to data-licensing deals, stating "with the impact on traffic (which is more valuable than licensing revenue), we believe data-licensing renewals are increasingly at risk."
