Newsletter

Reddit CEO Steve Huffman stated that in October, Google search referral traffic decreased by over 1 million times per week on average, and warned that if this trend continues, the daily active users in the fourth quarter could decline by double-digit percentages.

Reddit expects revenue in the fourth quarter to be between $1 billion and $1.03 billion, which is lower than the analysts' forecast of around $1.05 billion, despite a 53% increase in revenue in the third quarter.

After the company announced strong third-quarter results but provided revenue guidance for this quarter that fell short of expectations, there was a sell-off in the market.

The business model of Reddit is largely based on users discovering its discussion content through Google searches, but nowadays, an increasing number of visitors are finding the answers without even clicking to enter the platform. This puts pressure on its advertising business, which has always helped Reddit become one of the fastest-growing listed companies on the internet.

Reddit The third-quarter numbers initially looked promising. Revenue increased by 53% year-over-year to $895 million; advertising revenue grew by 54% to $847 million; net profit reached $283 million. Earnings per share after dilution were $1.40, a year-over-year increase of 75%, exceeding analysts' consensus forecast of $1.33. Earnings per share after dilution are used to measure the profit attributable to each share after taking into account potential dilutions.

However, user data is not so optimistic. Reddit reports that the daily active unique visitors number is 130.3 million, a year-on-year increase of 12%, but this is lower than the analysts' expected 134 million. In the United States, this figure actually decreased by 2% to 50.7 million, which makes investors more skeptical about whether the platform can continue to grow.

Huffman issued the above warning during the financial report conference call on Thursday. He explained that during October, Google search referral traffic decreased by more than 1 million times per week on average, and this decline accelerated at the end of the third quarter. If this trend continues, Reddit's total daily active users may see a double-digit percentage decrease in the fourth quarter compared to the current base of about 130 million.

Huffman directly mentions Google's AI Overviews and AI Mode. These features generate answers and summaries directly in the search results. Google is increasingly providing users with the information they want on its own pages, rather than directing them to other websites, thus further moving away from traditional search links.

When asked whether these changes led to a decline in search traffic for Reddit, Huffman stated that these AI features have been greatly expanded in the US and international markets. He told investors, " AI and mode will not bring traffic, at least not to us, and not to anyone I know."

This puts Reddit – and, in fact, almost all single-media websites on the internet – in an awkward position. People can still search for Reddit discussions, but Google search results increasingly allow users to consume the information from these discussions without visiting the Reddit website itself. Search referrals also bring back existing users, so a decrease in click-through rates affects both the acquisition of new users as well as platform retention and activity levels.

Reddit is attempting to reduce this dependency and shift towards a user-login-centric experience, which means that users will be required to log in with their accounts before accessing most of the platform's content. The company plans to test this change in markets outside of the United States in the fourth quarter.

This strategy is also related to the increasingly important industry partnerships of AI. In February 2024, Reddit signed a data licensing agreement with Google worth an alleged $60 million per year, allowing this search giant to use Reddit discussion content to train AI models. A few months later, the company announced a similar partnership with OpenAI, allowing ChatGPT developers to use Reddit content, while also enabling Reddit to obtain OpenAI technology.

These transactions have turned the vast corpus of artificial dialogue data Reddit into an asset that can be sold to developers of AI. However, the search experience provided by AI, which also benefits from the content of Reddit, may also lead to a decrease in the number of people who actually visit that website. Reddit has also begun to tighten access to public data and shift towards more restricted platforms, which has angered long-term users.

Over the past week, the stock has fallen by a cumulative 44%, with a sharp drop of 30.44% on Friday accounting for a significant portion of that decline. As of $90.15, the trading price of Reddit is far lower than it was a few days ago.

Technically, there has been almost no immediate relief either. The 50-day moving average of Reddit is around $149.80, while the 200-day moving average is close to $162.12. The 50-day moving average has fallen below the 200-day moving average, forming what is known as a “death cross,” which is generally considered a bearish signal associated with a longer-term downward trend.