Reddit showcased impressive performance in the second quarter, but concerns about search engine traffic fluctuations unnerved investors.
The platform generated $805 million in revenue, marking a 61% increase compared to the same period last year. Net income soared to $253 million, representing an increase of 183%, surpassing analysts’ forecasts. Furthermore, Reddit anticipates revenue between $860 million and $870 million for the next quarter, alongside promising pre-tax earnings, exceeding prior expectations.
Typically, positive projections would lead to stock price gains. However, shares fell by over 10% in after-hours trading.
This decline may be attributed to a cautionary note from CEO Steve Huffman in a shareholder letter. He stated that “search referrals were inconsistent this quarter, with increased volatility toward the end; nevertheless, the overall business remains robust.”
The evolving landscape of AI seems to be causing apprehension among investors regarding potential declines in Reddit’s traffic.
In 2024, Reddit entered into an agreement to supply content to Google for AI training purposes. However, Google’s use of AI summaries has seemingly been detracting from Reddit’s audience, leading the platform to reconsider the continuation of its relationship with Google.
Moreover, there are concerns about whether Reddit’s audience is expanding in the most beneficial markets. While global user numbers are up, the platform experienced a slight drop in daily active users within the United States, decreasing from 53.5 million to 53.2 million since the first quarter.
During a recent earnings call, analysts raised pointed questions regarding the impact of AI on Reddit’s audience.
One analyst remarked, “Your stock has dropped significantly because there’s a prevailing sentiment among investors that you are facing a user issue, particularly in the U.S.”
The analyst elaborated that as search trends shift toward AI, the platform’s logged-out traffic might decline due to reduced referrals, complicating user transitions from logged-out to logged-in statuses. He asked, “Do you foresee a situation where you won’t be licensing data to Google and OpenAI next year?”
In response, Huffman expressed confidence in Reddit’s human-centric approach as a sustained draw for users. “Reddit is about communities and conversations. These communities are universal, and we believe we have something for everyone in the U.S.; it’s about making that visible, and we are progressing in this direction,” Huffman stated.
Regarding Google, Huffman was less definitive. “Our partnership with Google goes back before the formal data licensing agreements. I don’t believe there’s a clear-cut outcome… we will strive to maximize Reddit’s value,” he said.
