Reddit delivered a strong second quarter that beat Wall Street expectations, but the stock tumbled more than 10% in after-hours trading after CEO Steve Huffman warned of "choppy" search referrals and investors grew anxious about the impact of artificial intelligence on the platform's audience.
The social media company reported total revenue of $805 million for Q2, up 61% year-over-year, and net income of $253 million, a 183% jump from the same period last year. Reddit also issued third-quarter guidance that beat expectations, forecasting revenue between $860 million and $870 million and "healthy earnings before taxes." Normally, stronger guidance would lift a stock, but Huffman's separate investor letter spooked the market.
The CEO's warning on search referrals
In his letter, Huffman wrote: "Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter, but the bigger picture is unchanged: the commercial business is strong." The comment signaled that Reddit's traffic from search engines, particularly Google, has become unpredictable, and that volatility intensified toward the end of the quarter.
The warning comes at a time when AI is reshaping the search landscape. In 2024, Reddit signed a contract to provide content to Google for AI training. But Google's AI summaries now appear to be reducing Reddit's audience share by answering queries directly on the search results page instead of sending users to the platform. Reddit has signaled uncertainty about whether it will renew that partnership.
Analysts press on a "user problem"
During the earnings call, one Wall Street analyst did not hold back. "I don't want to belabor this point, but your stock is down sharply because there is just a sense from investors that you have a, I don't want to, to be blunt, a user problem, especially in the U.S.," the analyst said. The blunt assessment reflected a growing concern that Reddit's growth in its home market is stalling.
The numbers back up that worry. Reddit's U.S. daily active uniques slipped from 53.5 million in Q1 to 53.2 million in Q2, a slight decline. While global users are up, the domestic stagnation has caught investors' attention. The analyst added that logged-out traffic, which relies heavily on search, will likely face pressure as search shifts to AI-generated answers.
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Huffman defends Reddit's human value
Huffman pushed back against the notion that Reddit is losing relevance. "Reddit is communities and conversation. 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. He argued that the platform's human-driven discussions make it a destination, not just a source of traffic for search engines.
When asked directly about the future of Reddit's data licensing deals, an analyst posed the question: "Do you see any world where you're not licensing data to Google and OpenAI next year?" Huffman was noncommittal. "Our relationship with them actually predates the formal kind of data licensing agreements," he said, referring to Google. He added, "I don't think there's a binary outcome … we will make sure that we're maximizing the value for Reddit."
The vagueness left investors unsure whether Reddit will continue to earn revenue from licensing its content to AI companies or whether those deals could dry up as AI models change how users find information.
AI's shadow over the earnings beat
Despite the strong financial results, revenue of $805 million and net income of $253 million, the market focused on the risks ahead. The 10% after-hours stock decline erased gains that might have followed a typical beat-and-raise quarter. Reddit's Q3 guidance of $860 million to $870 million in revenue topped analyst estimates, but it was not enough to calm fears.
The core tension is that Reddit's business is booming in the short term, but its long-term reliance on search traffic, especially from Google, is under threat from the very AI technology that the company is helping to train. Investors are now watching closely to see whether Reddit can maintain its audience as search engines evolve to keep users on their own pages.