Reddit shares plunged 30.44% to $90.15 on Friday following a warning from CEO Steve Huffman that Google's AI-powered search features are cutting referral traffic to the platform. The decline extended Reddit's weekly loss to 44%.
During Thursday's earnings call, Huffman disclosed that Google search referrals fell by more than one million per week in October. He warned that if the trend continues, Reddit's daily active users could decline by a low double-digit percentage in the fourth quarter from the current base of approximately 130 million.
Huffman attributed the traffic loss to Google's AI Overviews and AI Mode features, which generate answers and summaries directly within search results rather than directing users to external websites. "The AI mode does not drive traffic, not for us and not to anybody as far as I know," Huffman told investors.
The warning came despite Reddit reporting strong third-quarter results. The company posted revenue of $895 million, up 53% year over year, with advertising revenue increasing 54% to $847 million. Net income reached $283 million, and diluted earnings per share came in at $1.40, up 75% from a year earlier and above the $1.33 analyst consensus.
However, user metrics proved less encouraging. Reddit reported 130.3 million daily active unique visitors, up 12% year over year but below the roughly 134 million analysts expected. U.S. daily active users actually fell 2% to 50.7 million.
The company forecast fourth-quarter revenue of $1 billion to $1.03 billion, below the roughly $1.05 billion analysts had expected. This weaker-than-anticipated guidance contributed significantly to the stock's sharp decline.
Reddit has been working to reduce its dependence on search traffic by shifting toward a primarily logged-in experience. The company plans to begin testing this change in selected markets outside the U.S. during the fourth quarter.
The platform has also strengthened ties with the AI industry. In February 2024, Reddit signed a reported $60 million-per-year data licensing deal with Google. Later that year, the company announced a similar partnership with OpenAI, allowing the ChatGPT developer to use Reddit content while giving Reddit access to OpenAI's technology.
From a technical standpoint, Reddit's 50-day exponential moving average sits around $149.80, while its 200-day average is near $162.12. The 50-day average has fallen below the 200-day average, creating a death cross, a bearish signal associated with a longer-term downward trend. At the current price, Reddit would need to climb approximately 66% just to return to its 50-day average.
