Reddit beats earnings but stock sinks on AI search concerns

Reddit's strong financial results mask a deepening challenge: the shift toward AI-powered search engines is reshaping how users discover content online. The company signed a data-licensing deal with Google in 2024 to supply its content for AI training, a relationship that generated revenue but now appears to be working against Reddit's core traffic model. Google's AI summaries are answering user queries directly without sending them to Reddit, reducing the referral traffic that historically drove user acquisition and engagement.

The tension between Reddit's commercial success and its user growth is now visible in the market's reaction. While the company's advertising business remains strong and guidance for next quarter is solid, investors are fixating on a problem that the strong earnings cannot solve: if search—the primary gateway to Reddit—continues shifting toward AI summaries, Reddit faces a structural threat to its ability to convert logged-out casual visitors into registered users. This is particularly acute in the U.S., where daily active unique users actually declined from Q1, signaling that even a growing global base cannot offset domestic headwinds.

Huffman's response has been to emphasize Reddit's differentiation as a community platform, arguing that human conversation and the authenticity of user-generated content will keep people coming to Reddit directly. On the Google partnership, he left room for renegotiation, neither committing to renewal nor ruling it out, suggesting the company is still weighing the trade-offs between licensing revenue and search traffic loss.