Reddit (NYSE: RDDT) reported impressive second-quarter results and raised its outlook, yet the stock is under heavy pressure on Friday, extending a slide that has now erased more than 40% of its value since the start of the year. The disconnect between solid headline numbers and investor anxiety highlights growing concerns about the platform's long-term growth trajectory.
Q2 earnings beat expectations
For the quarter, Reddit posted revenue of $805 million, up 61% year-over-year, and earnings per share of $1.25, both surpassing analyst estimates. Advertising revenue surged 64%, giving management confidence to issue better-than-expected guidance for the coming quarters. Despite these strong figures, the stock is tumbling, indicating that the market is focusing on risks that go beyond the immediate financials.
AI search changes spook investors
The primary worry is the impact of Google's AI-powered search changes. In its earnings release, Reddit acknowledged that search referrals from Alphabet (NASDAQ: GOOGL) have become "choppy" or volatile. Historically, Reddit has relied heavily on Google Search to drive new visitors to its platform. With Google increasingly integrating AI-generated answers into search results, investors fear that users may get the information they need without ever clicking through to Reddit, potentially reducing traffic over time.
This concern is so pronounced that reports emerged last week suggesting Reddit is seeking to renegotiate its data licensing deal with Google or possibly walk away from it entirely. The uncertainty around these negotiations adds another layer of risk to the stock.
US user growth disappoints
Beyond AI fears, Reddit's user growth in the United States also fell short of expectations. While global daily active users (DAUs) rose to 130.3 million, US growth was only about 6%. International markets accounted for 85% of net new users, but that geographic mix is less profitable. Reddit generates significantly more revenue per user in the US—about $11.85 compared to just $2.26 internationally—highlighting the monetization gap outside its home market.
The slowdown in US user growth is particularly concerning because it suggests that the platform may be reaching saturation in its most valuable market, and the reliance on international growth could pressure average revenue per user (ARPU) going forward.
Technical selling adds pressure
Adding to the bearish sentiment, Reddit shares have broken below their 50-day and 100-day moving averages, which often triggers algorithmic selling and can accelerate downward momentum in the near term. This technical breakdown, combined with fundamental concerns, has created a perfect storm for the stock.
Analysts remain cautiously optimistic
Despite the sell-off, Wall Street remains largely bullish on Reddit. The consensus rating is Moderate Buy, with a mean price target of $224, implying significant upside from current levels. However, analysts are increasingly questioning whether Reddit can offset potential declines in search-driven traffic with its data licensing deals with companies like OpenAI and Alphabet. The lack of major updates on these agreements during the earnings call has left investors wanting more clarity.
As the market grapples with the existential question of AI's impact on content platforms, Reddit's future growth hinges on its ability to diversify traffic sources and monetize its international user base effectively. For now, the market is voting with its feet, and the stock's decline reflects the uncertainty ahead.
This article is for informational purposes only and does not constitute financial advice.
