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Reddit Inc. saw its stock take a sharp dive in after-hours trading after its fourth-quarter user growth failed to meet Wall Street’s predictions. The slowdown suggests the platform is struggling to keep pace with industry giants like Meta and Google, which dominate the digital advertising sector.
The social media site reported an average of 101.7 million daily active users during the quarter, missing analysts’ projections of 103.8 million. The decline is attributed to a recent algorithm update by Google, which significantly impacted Reddit’s search traffic.
Google’s Algorithm Change Hits Reddit’s Growth
Google, the world’s largest search engine, plays a crucial role in directing traffic to Reddit. On some days, Google has been responsible for up to 50% of Reddit’s visitors. However, a recent algorithm adjustment affected how Reddit pages appeared in search results, leading to a noticeable dip in user growth.
Reddit’s CEO Steve Huffman acknowledged the issue, stating that the impact was mainly felt in the U.S. among users who were not logged into the platform. However, he expressed optimism, noting that the company has already observed signs of recovery in the first quarter.
Following the earnings report, Reddit’s shares plunged by 18% in extended trading. Despite this setback, the stock remains a standout performer, having surged over sixfold since its public debut last March. It has also climbed more than 30% this year, outpacing broader market trends.
Analysts Cite AI as a Factor in User Growth Struggles
Mandeep Singh, an analyst at Bloomberg Intelligence, pointed out that the rise of large language model (LLM) applications and AI-powered search tools may be affecting Reddit’s traffic. These platforms often display summarized answers directly on search pages, reducing the need for users to click through to Reddit discussions.
To counter this, Reddit is reportedly looking into AI-driven solutions to reduce its reliance on Google and LLM-powered search engines.
Strong Financial Performance Despite User Growth Concerns
While user growth slowed, Reddit’s holiday-quarter revenue surged 71% to $427.7 million, surpassing analysts’ estimates of $405 million. The company reported a net income of $71 million, or 36 cents per share. Looking ahead, Reddit forecasts first-quarter revenue between $360 million and $370 million, beating the average analyst prediction of $359 million.
To strengthen its ad business, Reddit has been investing heavily in advertising technology and launching new ad formats, such as shopping and video ads. It has also secured partnerships with major sports leagues to attract advertisers.
Reddit Expands AI Ventures to Diversify Revenue
Beyond advertising, Reddit is broadening its revenue streams through AI-driven data licensing deals. Last year, it signed agreements worth $203 million with major players like Google and OpenAI, with more deals expected in the near future.
Huffman confirmed that Reddit continues to negotiate new AI-related partnerships, while also developing its own AI models. The company recently introduced an AI-powered chatbot designed to improve search functionality and enhance user engagement.
With a clear focus on AI and advertising innovation, Reddit is positioning itself for long-term growth despite short-term setbacks in user expansion.
