Reddit reports a solid quarter but shows signs of AI’s impact
Reddit's financial situation is looking good but uncertainty about its relationship to Google and the new AI-ified web are stirring market concerns.
Reddit reported a strong second quarter but spooked investors by mentioning in an investor letter that traffic from search engines had grown “choppy.”
The company’s total revenue of $805 million jumped 61% compared to the year-ago quarter while net income was $253 million, up 183%. These beat Wall Street’s expectations. Plus, the company said it expects to hit revenue of $860 million to $870 million with healthy earnings before taxes next quarter as well, which beat expected guidance.
Normally, telling investors that they can expect even better results to come would cause a stock to rise. But the stock slid over 10% in after-hours trading.
The culprit was likely CEO Steve Huffman’s warning in that separate letter to shareholders. “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,” he wrote.
AI is clearly changing the search engine landscape — and investors seem to fear that Reddit’s traffic may suffer.
In 2024, Reddit signed a contract to provide its content to Google for the purposes of AI training. However, Google’s deployment of AI summaries appears to be peeling away audience share from Reddit, and the site has signaled it’s not sure whether it will renew the partnership with the search giant.
Another sticking point has been whether Reddit’s audience is growing in the right places or not. Reddit’s global users are up, but the platform saw U.S. users, in terms of daily active uniques, endure a very slight decline — 53.2 million from 53.5 million in Q1.
During Thursday’s earnings call, some analysts aggressively questioned AI’s impact on Reddit’s audience.
“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.,” one Wall Street analyst said.
“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,” the analyst continued, asking, “Do you see any world where you’re not licensing data to Google and OpenAI next year?”
Huffman said that he felt that the human aspect of Reddit would continue to make it a destination for users. “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,” Huffman said.
When it comes to Google, Huffman was vaguer. “Our relationship with them actually predates the formal kind of data licensing agreements,” he said. “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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Key takeaways
- Reddit showed financial growth, but search traffic volatility is concerning.
- The partnership with Google for AI training may bring benefits, but uncertainty about its renewal poses a risk.
- The slight decline in active users in the U.S. highlights the need for retention and growth in saturated markets.
Editorial analysis
Reddit's financial situation, while positive, raises important questions about the platform's adaptation to the changes brought about by artificial intelligence (AI) in the search landscape. The robust growth in revenue and net income signals that the company is performing well financially, but the volatility in search engine traffic suggests that reliance on search referrals may be a weak point. For the Brazilian tech sector, this serves as a warning about the need to diversify traffic sources and the importance of quickly adapting to new content consumption dynamics, especially in an increasingly AI-dominated environment.
Moreover, Reddit's partnership with Google for AI training could have significant implications. While this collaboration may bring short-term benefits, uncertainty regarding contract renewal and the impact of AI on the platform's audience indicates that Reddit may be at a crossroads. Brazil, with its growing digital market, should observe how local platforms are positioning themselves regarding similar partnerships and how they are preparing to compete with major players utilizing AI to optimize user experience.
The slight decline in daily active users in the U.S. is also a warning sign. For companies operating in saturated markets like Brazil, user retention and growth are crucial. The pressure to convert logged-out users to logged-in ones can be challenging, especially if the search trend continues to shift towards AI solutions that prioritize quick summaries and responses over visits to platforms like Reddit. What we see here is a shift in consumer behavior that could be replicated in other markets, including Brazil, where interaction with digital platforms is constantly evolving.
Finally, analysts' questioning of AI's impact on Reddit's audience reflects a broader concern about the sustainability of platforms that heavily rely on search traffic. As Brazilian tech companies adapt to these changes, it will be crucial for them to develop strategies that not only respond to current trends but also anticipate future user needs in an increasingly AI-shaped world.
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