Solid Numbers, but a Troubling Signal
On paper, Reddit just delivered a quarter most companies would envy. Revenue hit $805 million — a 61% jump from last year. Net income surged 183% to $253 million. Both figures sailed past what Wall Street analysts had predicted. The company even guided for next quarter revenue between $860 million and $870 million, with healthy pre-tax earnings.
So why did the stock tumble more than 10% in after-hours trading?
The answer lies in a single word CEO Steve Huffman used in a letter to shareholders: choppy.
The ‘Choppy’ Search Referral Problem
Huffman wrote that search referrals — the traffic Reddit gets from people clicking links on Google and other engines — were “choppy in the quarter” and became “more volatile” toward the end of Q2. “The bigger picture is unchanged: the commercial business is strong,” he added.
Investors didn’t buy the reassurance. The drop suggests they see the choppiness as a symptom of something bigger: Google’s AI Overviews and other generative search features are starting to eat into Reddit’s organic traffic.
It’s a delicate moment. In 2024, Reddit signed a data-licensing deal with Google, letting the search giant train its AI models on Reddit content. But now Google’s own AI summaries — which pull answers directly from sources without requiring a click — appear to be siphoning off the very users Reddit relies on for ad revenue and engagement.
Reddit has already signaled uncertainty about renewing that partnership.
U.S. Users Dipped — and Analysts Pounced
Reddit’s global daily active unique visitors grew, but the U.S. number slipped slightly: from 53.5 million in Q1 to 53.2 million in Q2. That’s a tiny drop — 0.6% — but it set off alarms.
During Thursday’s earnings call, one analyst didn’t mince words. “I don’t want to belabor this point, but your stock is down sharply because there is just a sense from investors that you have a — I don’t want to, to be blunt — a user problem, especially in the U.S.,” the analyst said.
The same analyst laid out the fear plainly: logged-out traffic is under pressure as search shifts to AI, cutting off referral flows. And if fewer people discover Reddit through search, fewer convert to logged-in, registered users. That’s the core worry.
The analyst then asked directly: “Do you see any world where you’re not licensing data to Google and OpenAI next year?”
Huffman Bets on Human Connection
Huffman pushed back, arguing that Reddit’s value isn’t in raw search traffic — it’s in authentic community conversation. “Reddit is communities and conversation. Communities are universal, and so we think we have in the U.S. content for everyone, and it’s a matter of revealing that,” he said.
On the Google relationship, Huffman was more cagey. He noted that Reddit’s ties with Google predate any formal licensing deal. “I don’t think there’s a binary outcome,” he said. “We will make sure that we’re maximizing the value for Reddit.”
That vagueness didn’t calm the market. Investors want to know whether Reddit can keep growing its user base in an AI-dominated search world — or whether it’s becoming a raw material supplier for the very tools that threaten its traffic.
What This Means for Reddit’s Future
The Q2 numbers are objectively strong. Revenue growth at 61% and net income nearly tripling are rare for a company that only went public in March 2024. But the market is forward-looking, and the forward picture is murky.
Three questions hang over Reddit:
- Can Reddit diversify traffic sources beyond Google search, especially as AI summaries reduce click-through rates?
- Will the U.S. user decline turn into a trend, or was it just noise in a strong quarter?
- What happens when the Google data-licensing deal comes up for renewal? If Reddit walks away, it loses a revenue stream. If it stays, it may be feeding the beast that eats its traffic.
For now, Reddit has the financial cushion to experiment. The core product — real conversations among real people — remains differentiated from AI-generated content. But the stock’s after-hours slide is a clear message: Wall Street is watching how Reddit navigates a search landscape that’s shifting faster than anyone expected.
