Reddit shares plunged on Friday despite the social media platform reporting stronger-than-expected third-quarter earnings, as disappointing revenue guidance and slowing user growth raised fresh concerns among investors.
The stock fell approximately 22% shortly after the US market opened, reflecting growing uncertainty about Reddit’s ability to maintain its rapid expansion amid declining search traffic from Google.
Although the company delivered impressive revenue and profit growth, investors focused on the potential impact of artificial intelligence-powered search results on its future performance.
Reddit Stock Plunges Despite Strong Q3 Earnings
Reddit reported adjusted earnings of $1.40 per share for the third quarter, exceeding Wall Street’s consensus estimate of $1.33.
Revenue climbed 53% year over year to $895 million, surpassing analysts’ expectations of approximately $874.9 million.
However, the company’s fourth-quarter financial outlook disappointed investors.
Reddit projected revenue between $1 billion and $1.03 billion, with the midpoint of $1.015 billion falling below Wall Street’s forecast of $1.05 billion.
The weaker guidance overshadowed the company’s strong quarterly results, triggering substantial selling pressure on Reddit stock.
Investors are increasingly concerned that slowing audience growth could eventually affect advertising revenue and the company’s longer-term financial performance.
Google AI Overviews Threaten Reddit’s User Growth
One of the biggest challenges facing Reddit is the changing way internet users discover online content.
Google’s artificial intelligence-powered search features, particularly AI Overviews, have emerged as a potential threat to websites that depend heavily on search engine referrals.
Reddit CEO Steve Huffman acknowledged that search referral traffic declined significantly during the third quarter, with the slowdown accelerating toward the end of the reporting period.
In October, the platform experienced an average decline of more than one million search referrals per week.
If the trend continues, Reddit warned that daily active unique users could fall by a low-double-digit percentage during the fourth quarter compared with its current audience of 130.3 million.
The warning raised concerns about Reddit’s ability to attract new visitors and maintain engagement as AI-generated search summaries become more widespread.
Reddit Daily Active User Growth Slows Sharply
Reddit’s daily active unique users increased 12% year over year during the third quarter.
Although the platform continued expanding, the growth rate represented a six-percentage-point slowdown compared with the previous quarter.
The weakness was particularly noticeable among logged-out users in the United States, a segment that relies heavily on external search engines to discover Reddit discussions.
Analysts pointed to Google’s expanding AI Overviews feature as a major contributor to declining referral traffic.
Jefferies analyst John Colantuoni highlighted that Reddit’s strong revenue and adjusted EBITDA growth were overshadowed by deteriorating US user trends.
The analyst also warned that slower growth in the fourth quarter could raise questions about the sustainability of Reddit’s business expansion.
Nevertheless, Jefferies maintained a constructive longer-term view, citing the platform’s opportunities to generate additional revenue from its existing audience.
Meanwhile, Reddit’s weekly active unique users increased 16% to 515.2 million, demonstrating that the platform continues attracting a substantial global audience.
Wall Street Analysts Downgrade Reddit Stock
The disappointing outlook prompted several investment firms to reassess their expectations for Reddit shares.
KeyBanc Capital Markets downgraded the stock from Overweight to Sector Weight, citing greater-than-expected pressure from declining search traffic.
The firm warned that Reddit could experience a low-double-digit sequential decline in daily active users during the fourth quarter.
According to KeyBanc, the worsening traffic outlook creates additional uncertainty surrounding the company’s revenue and adjusted EBITDA projections for 2027 and 2028.
Citizens also lowered its rating on Reddit from Outperform to Market Perform.
The investment firm pointed to slowing US daily active user growth and the potential impact of reduced traffic from Google.
These downgrades reflect growing concerns that Reddit’s dependence on external search engines could become a significant obstacle to future expansion.
Reddit Plans to Reduce Its Dependence on Google Search
In response to declining search referrals, Reddit is focusing on increasing engagement among registered users and encouraging greater adoption of its mobile application.
CEO Steve Huffman explained that logged-in users and app audiences account for more than 80% of the company’s monetization.
As a result, Reddit intends to prioritize user retention, strengthen engagement and expand its direct relationship with its audience.
The company also plans to begin testing a primarily logged-in user experience in selected international markets during the fourth quarter.
This approach could help reduce Reddit’s reliance on Google as a major source of new visitors.
By encouraging users to access the platform directly, Reddit aims to develop a more stable audience and improve its ability to generate advertising revenue.
Huffman expressed confidence in the platform’s unique appeal, emphasizing the value of authentic human discussions and community-driven content.
He also noted that Reddit had generated more than $3 billion in revenue over the previous 12 months, highlighting the company’s growing commercial importance.
Reddit Advertising Revenue Jumps 54%
Despite the challenges surrounding user growth, Reddit’s advertising business continued delivering strong financial results.
Advertising revenue increased 54% year over year to $847 million during the third quarter.
The substantial increase demonstrates the platform’s ability to generate higher revenue from advertisers seeking access to its communities and user-generated discussions.
Meanwhile, net income surged 74% to $283 million, representing a net profit margin of approximately 32%.
Adjusted EBITDA climbed 70% to $402 million, resulting in an adjusted EBITDA margin of 45%.
These figures highlight Reddit’s improving profitability, even as the company faces uncertainty surrounding future audience growth.
For the fourth quarter, Reddit expects adjusted EBITDA to range between $480 million and $510 million.
The company also disclosed that it repurchased approximately 670,000 shares for $100 million during the third quarter.
Reddit Stock Outlook Depends on User Growth Recovery
Reddit’s latest earnings demonstrate a growing contrast between its strong financial performance and the challenges facing its audience expansion.
Although revenue, advertising income and profitability continue increasing rapidly, slowing daily active user growth has become a major concern for investors.
The expanding use of artificial intelligence in Google Search could further change how users discover Reddit content, potentially reducing the platform’s dependence on search referrals as a reliable growth channel.
However, Reddit’s efforts to increase direct engagement, improve mobile app adoption and strengthen its logged-in audience could help offset these challenges over time.
Investors will closely monitor upcoming user growth figures, advertising performance and management guidance for signs of improvement.
For now, the sharp decline in Reddit shares suggests that Wall Street is placing greater emphasis on the sustainability of future growth than on the company’s impressive third-quarter earnings.
