Despite reporting a robust second quarter, Reddit's stock experienced a decline after the company noted in an investor letter that traffic originating from search engines had become "choppy."
Reddit's financial results significantly surpassed market expectations, with total revenue soaring to $805 million, a 61% increase year-over-year. Net income also saw a remarkable surge of 183%, reaching $253 million. Furthermore, the company provided optimistic guidance for the upcoming quarter, projecting revenues between $860 million and $870 million, alongside strong earnings before taxes, exceeding analyst forecasts.
Ordinarily, such positive forward-looking statements would galvanize investor confidence and lead to a stock rally. However, Reddit's shares unexpectedly dropped over 10% in after-hours trading.
The primary factor behind this downturn was likely a cautionary statement from CEO Steve Huffman in a separate communication to shareholders. He stated, "Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter, but the bigger picture is unchanged: the commercial business is strong."
This observation comes amidst a rapidly evolving search engine landscape, profoundly impacted by artificial intelligence, leading investors to apprehend a potential adverse effect on Reddit's user traffic.
Earlier in 2024, Reddit entered into an agreement to license its content to Google for AI training purposes. Yet, concerns have emerged that Google's subsequent integration of AI summaries is inadvertently siphoning off audience engagement from Reddit. Consequently, Reddit has indicated uncertainty regarding the renewal of this partnership with the search behemoth.
Further exacerbating investor unease is the question of whether Reddit's audience growth is geographically optimal. While global user numbers have increased, the platform observed a marginal decrease in U.S. daily active unique users, dropping from 53.5 million in Q1 to 53.2 million.
During the earnings call on Thursday, several analysts intensely scrutinized the potential ramifications of AI on Reddit's user base.
One Wall Street analyst directly addressed the issue, stating, "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 elaborated on the investor perspective, explaining, "People are looking at the daily and saying, you know, the logged-out traffic is going to be under pressure because as search shifts to AI, you’re not going to get referrals, and that it’s going to be harder to get people to go from logged-out to logged-in, and that’s sort of symptomatic of what you’re seeing." They then posed a critical question: "Do you see any world where you’re not licensing data to Google and OpenAI next year?"
In response, CEO Huffman expressed confidence in Reddit's enduring appeal, emphasizing the platform's inherent human element. He affirmed, "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. And we’re making progress towards that end."
Regarding the future of the Google partnership, Huffman adopted a more ambiguous stance. He noted, "Our relationship with them actually predates the formal kind of data licensing agreements," and concluded by stating, "I don’t think there’s a binary outcome … we will make sure that we’re maximizing the value for Reddit."
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