Reddit Stock Plunges 30% as Google's AI Search Hits Traffic and User Growth - Decrypt

In brief

• Reddit shares plunged 30.44% to $90.15 on Friday, extending their weekly decline to 44%.
• CEO Steve Huffman said Google search referrals fell by more than 1 million per week in October and warned daily active users could decline by a low double-digit percentage in Q4 if the trend continues.
• Reddit forecast fourth-quarter revenue of $1 billion to $1.03 billion, below the roughly $1.05 billion analysts expected, despite reporting 53% revenue growth in Q3.

Reddit shares plunged 30.44% to $90.15 on Friday after CEO Steve Huffman warned that Google's AI-powered search features are cutting referral traffic and could shrink the platform's user base.

The selloff came after the company reported strong third-quarter results but issued a weaker-than-expected revenue forecast for the current quarter.

Reddit built much of its business around people discovering its discussions through Google searches, and those visitors are increasingly finding answers without ever clicking through to the platform. That puts pressure on the advertising business that has helped turn Reddit into one of the internet's fastest-growing publicly traded companies.

Reddit's third-quarter numbers initially looked healthy. Revenue climbed 53% year over year to $895 million, advertising revenue increased 54% to $847 million, and net income reached $283 million. Diluted earnings per share, which measure company profit attributable to each share while accounting for potential dilution, came in at $1.40, up 75% from a year earlier and above the $1.33 analyst consensus.

But the audience figures were less encouraging since Reddit reported 130.3 million daily active unique visitors, up 12% year over year but below the roughly 134 million analysts expected. In the U.S., the number actually fell 2% to 50.7 million, giving investors another reason to question whether the platform can maintain its growth.

Huffman delivered the warning during Thursday's earnings call, explaining that Google search referrals had fallen by more than one million on average every week during October, with the decline accelerating toward the end of the third quarter. If that pace continues, Reddit's total daily active users could fall by a low double-digit percentage in Q4 from the current base of around 130 million.

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Huffman pointed directly at Google's AI Overviews and AI Mode, features that generate answers and summaries directly inside search results. Rather than sending users to websites to find information, Google increasingly gives them what they are looking for on its own page, pushing traditional search links further down.

Asked whether the changes were responsible for Reddit's declining search traffic, Huffman said the AI features had expanded aggressively in the U.S. and internationally. "The AI mode does not drive traffic, not for us and not to anybody as far as I know," he told investors.

That creates an awkward situation for Reddit—and arguably every other single media site on the internet. People can still search for Reddit discussions, but Google's results increasingly allow them to consume information from those discussions without visiting Reddit itself. Search referrals also bring back existing users, meaning fewer clicks can affect both new-user acquisition and the platform's ability to keep people engaged.

Reddit is trying to reduce that dependence by moving toward a primarily logged-in experience, which would require people to sign into an account before accessing most of the platform. The company plans to begin testing the change in selected markets outside the U.S. during the fourth quarter.

The strategy also connects to Reddit's increasingly important relationship with the AI industry. In February 2024, Reddit signed a reported $60 million-a-year data licensing deal with Google, giving the search giant access to Reddit discussions to train AI models. A few months later, the company announced a similar partnership with OpenAI, allowing the ChatGPT developer to use Reddit content while giving Reddit access to OpenAI's technology.

Those deals turned Reddit's enormous archive of human conversations into something it could sell to AI developers. But the same AI-powered search experience that benefits from Reddit's content can reduce the number of people who actually visit the site. Reddit also started tightening access to its public data and moving toward a more restricted platform which angered long term users.

The stock has now lost 44% over the past week, with Friday's 30.44% plunge accounting for a significant portion of the decline. At $90.15, Reddit is trading well below the levels it held just days ago.

The technical picture offers little immediate relief. Reddit's 50-day exponential moving average, a trend indicator that gives greater weight to recent prices, sits around $149.80, while its 200-day average is near $162.12. The 50-day average has already fallen below the 200-day average, creating a so-called death cross, a bearish signal commonly associated with a longer-term downward trend.

At $90.15, Reddit would need to climb approximately 66%—almost 70%—just to return to its 50-day average. That would only bring the share price back to the shorter-term trend line, not undo the death cross itself. With both averages sitting far above the current price, a recovery to those levels in the near term looks increasingly unlikely.

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