Reddit beats earnings but stock sinks on AI search concerns

Reddit entered its second-quarter earnings season with impressive financial momentum. The platform reported total revenue of $805 million, representing a 61% jump compared to the same quarter a year earlier, while net income surged to $253 million, up 183%. Both figures exceeded Wall Street expectations. Looking ahead, the company guided investors to expect revenue between $860 million and $870 million in Q3, with healthy earnings before taxes—another beat on consensus forecasts.

Under normal circumstances, such robust results paired with optimistic forward guidance would trigger a stock rally. Instead, Reddit's share price fell over 10% in after-hours trading, a sharp reversal that caught many observers off guard. The culprit was a separate shareholder letter from CEO Steve Huffman that injected a note of caution into the earnings narrative. "Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter," Huffman wrote, though he added that "the bigger picture is unchanged: the commercial business is strong."

The underlying concern reflected in the stock sell-off is that artificial intelligence is fundamentally reshaping the search landscape, and Reddit appears vulnerable. In 2024, Reddit entered into a data-licensing contract with Google, providing the search giant with Reddit content for AI training purposes. However, Google's rollout of AI-powered summaries—which answer user queries directly within the search interface—appears to be siphoning traffic away from Reddit itself. Users who previously would have clicked through to Reddit to read discussions and community answers now get abbreviated AI-generated summaries instead. This dynamic threatens Reddit's core traffic model, which has long depended on search engine referrals to funnel casual visitors to the platform, many of whom might eventually become registered users.

During the earnings call, Wall Street analysts pressed Huffman hard on the AI threat and its implications for user growth. One analyst bluntly framed the stock decline as a reflection of perceived user-growth troubles, particularly in the United States. "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," the analyst said. The data support this concern: Reddit's U.S. daily active unique users declined slightly, from 53.5 million in Q1 to 53.2 million in Q2, even as global users grew overall.

When pressed on whether Reddit would renew its data-licensing agreements with Google and OpenAI next year, Huffman avoided a direct answer. Instead, he emphasized Reddit's identity as a platform built on community and conversation, arguing that the authenticity and human element of Reddit would continue to draw users directly, rather than through search referrals. "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," he said. On Google specifically, Huffman was more evasive, noting that the relationship predates formal data-licensing agreements and that there may be multiple paths forward. "I don't think there's a binary outcome," he said. "We will make sure that we're maximizing the value for Reddit." The statement leaves open the possibility that Reddit could renegotiate, modify, or even decline to renew the partnership as it weighs the short-term licensing revenue against the longer-term risk to organic traffic.