Reddit beats expectations but warns of AI-driven traffic volatility
Reddit reported strong second-quarter earnings, beating estimates, but its stock dropped over 10% after the company cautioned about uneven search traffic and the impact of artificial intelligence on its audience.
Reddit's second-quarter results topped Wall Street expectations, yet investors reacted negatively after the company mentioned that search engine referrals had become "choppy." The stock fell more than 10% in after-hours trading.
The company posted total revenue of $805 million, a 61% increase from the same quarter last year, while net income reached $253 million, up 183%. For the next quarter, Reddit expects revenue between $860 million and $870 million, along with healthy pre-tax earnings, also beating guidance forecasts.
However, the decline in share price was likely driven by CEO Steve Huffman's letter to shareholders, in which he warned that search referrals were volatile during the quarter, especially later in the period. Huffman stressed that the commercial business remains strong and the bigger picture is unchanged.
Artificial intelligence is clearly reshaping the search landscape. In 2024, Reddit signed a deal with Google to provide content for AI training. But as Google has rolled out AI-generated summaries, Reddit appears to be losing some audience to those features. The company has indicated uncertainty about renewing its partnership with the search giant.
Another concern centers on audience growth. While Reddit's global user numbers are up, daily active uniques in the U.S. saw a slight decline—from 53.5 million in the first quarter to 53.2 million. During Thursday's earnings call, analysts pressed hard on AI's impact. One Wall Street analyst noted that the sharp stock drop reflects investor concerns about a user problem in the U.S., especially regarding logged-out traffic, which may face pressure as search shifts to AI and referrals diminish.
Huffman responded that Reddit remains a destination because it is built on communities and conversation. He said the company is making progress in the U.S. Regarding Google, he was vague, noting that their relationship predates formal data licensing agreements and that there is no binary outcome; Reddit will aim to maximize its value.
