Reddit's stock experienced a dramatic decline of more than 25% in early trading on Friday, following the company's warning that user growth could deteriorate further in the fourth quarter. The social media platform cited ongoing reductions in traffic from Google search as a primary factor, raising concerns among investors about its ability to sustain momentum.
Chief Executive Steve Huffman indicated that daily active unique visitors might fall by a low double-digit percentage in the current quarter, down from approximately 130 million, if referral traffic continues to diminish. This cautionary outlook overshadowed the company's stronger-than-expected third-quarter results, which included a 53% increase in revenue.
Reddit projected fourth-quarter revenue in the range of $1 billion to $1.03 billion, falling short of the Bloomberg consensus estimate of $1.05 billion. This shortfall has intensified worries about the sustainability of its advertising business amid evolving online search dynamics.
The disappointing guidance prompted several analysts to reassess their positions on the stock, which has already declined 46% this year. BofA Securities and Citizens both downgraded their ratings, while Guggenheim and Needham maintained Buy recommendations but significantly reduced their price targets.
Google's AI Search Raises Traffic Concerns
Reddit has increasingly attributed its user traffic challenges to changes in Google's search experience. AI-powered search features can answer queries directly, potentially reducing the need for users to click through to websites and online communities.
Huffman noted that search engine referrals to Reddit had declined by more than one million on average each week during October. He also argued that Google's AI search experience was failing to direct users to the platform despite continued crawling of its content.
"Google is crawling us as hard as ever, so the demand hasn't changed from their point of view either. The reality is, the AI mode does not drive traffic, not for us and not to anybody," Huffman said on the post-earnings call.
In response, Reddit is shifting its focus toward registered users and its mobile application. On Thursday, Huffman outlined plans to require sign-ins for access to most content, partly to deter data scraping by artificial intelligence companies. This strategy could help Reddit protect its data and improve advertising targeting, but it also carries the risk of reducing the number of casual visitors who access its communities through search engines.
Strong Third-Quarter Results Fail to Reassure Investors
Reddit reported third-quarter revenue of $895 million, up 53% year over year and above the Bloomberg consensus estimate of $869.6 million. 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.
However, the latest revenue growth marked a slowdown from the company's previous performance. Reddit had reported eight consecutive quarters of revenue growth exceeding 60% as recently as its second-quarter results in July. The weaker growth trajectory, combined with the user figures and fourth-quarter forecast, raised questions about whether the company can sustain its rapid expansion.
Huffman described the revenue outlook as resilient despite the pressure on search traffic. "It’s still a strong guide," he said. "We are still growing at an industry-leading rate, and that’s despite the headwinds from search referrals."
Analysts Cut Price Targets as Outlook Deteriorates
BofA Securities lowered its price target on Reddit to $135 from $190 while maintaining a Neutral rating. The firm expects investor sentiment to remain subdued for several quarters until the company establishes a positive trajectory for US logged-in user growth, which has been challenging since 2024. BofA also warned that traffic headwinds could intensify before improving and highlighted uncertainty surrounding Reddit's planned transition towards a logged-in-only experience.
Citizens downgraded Reddit to Market Perform from Market Outperform, citing declining user growth and reduced referrals from Google. Analyst Andrew Boone noted that US daily active users had fallen 5% quarter over quarter and warned that Google's push towards AI-powered search could worsen the platform's logged-out traffic problems. Citizens acknowledged that Reddit continued to execute well on monetisation but said uncertainty surrounding user growth was putting greater pressure on its ability to generate revenue from existing users.
Reddit's global daily active uniques were flat quarter over quarter at 130.3 million in the third quarter, although they were up 12% from a year earlier. In the US, daily active uniques fell to 50.7 million from 53.2 million in the second quarter, marking a 2% year-over-year decline. The US decline is particularly significant because it represents the first annual contraction in the metric since Reddit went public in 2024.
Huffman sought to emphasise that the company's most valuable audience remained intact. "The vast majority of our revenue comes from our app users and logged-in users are direct traffic, and both of those are up Q. over Q., and so that’s where our focus is," he said.
This article is for informational purposes only and does not constitute financial advice.
