Reddit reported a 61% revenue jump to $805 million, but shares dropped over 10% after management flagged volatile search traffic. Investors are concerned that AI-powered search tools may reduce user engagement and affect future data licensing deals.
Reddit Inc. reported strong financial growth for its second quarter, with revenue rising 61% year-over-year to $805 million and net income reaching $253 million. While these figures beat market expectations, the stock fell more than 10% in after-hours trading as investors reacted to warnings about shifting user traffic patterns.
AI Impact on Search Traffic
The primary concern voiced by investors stems from management's comments regarding search engine referral traffic, which CEO Steve Huffman described as choppy and increasingly volatile. This shift is widely attributed to the growth of AI-powered search tools. These tools, which often provide direct summaries of web content, may reduce the need for users to click through to platforms like Reddit. If users spend less time on the site, the company may face long-term challenges in maintaining user growth and advertising revenue.
Data Licensing and Future Growth
Reddit has pursued a strategy of licensing its vast database of human-driven conversations to companies like Google and OpenAI for AI model training. While this has provided a new revenue stream, it has also created a complex dynamic. Search giants are both partners in data licensing and potential competitors in the search space. During the earnings call, management remained cautious regarding the future of the Google partnership, declining to provide a clear outlook on potential renewals. This uncertainty has left investors questioning the sustainability of this income source if search traffic continues to decline.
User Engagement Trends
Beyond search traffic, scrutiny has turned toward user retention. While Reddit's global user base has grown, the number of daily active unique users in the United States saw a slight decline, moving from 53.5 million in the first quarter to 53.2 million. Analysts have raised concerns that if AI-driven search changes how people discover and consume content, it may become harder to convert casual visitors into logged-in, long-term members of the community.
Moving forward, the company has provided a revenue outlook between $860 million and $870 million for the next quarter. Investors will likely watch whether user engagement metrics recover and how Reddit manages the balance between licensing its data for AI and protecting its core traffic from the very search engines it partners with.