Reddit Crashes As Weak User Growth Spooks Wall Street

Reddit shares crashed in premarket trading in New York after quarterly user numbers missed the Bloomberg consensus estimates and its revenue outlook disappointed. This sparked concerns about slowing search traffic and new plans to restrict platform access to users with accounts, as the CEO warned, "Google is crawling us as hard as ever."

Daily active users rose 12% to 130.3 million in the third quarter, below estimates of 133.53 million. US users fell 1.7% to 50.7 million, missing expectations of 53.5 million, while international users increased 24%.

Bank of America internet analyst Justin Post commented on Reddit's shift toward a logged-in experience, a major business-model transformation triggered by the rise of Google's AI-powered search features, such as AI Overviews and AI Mode.

Post explained:

The user miss was driven by weaker search-referral traffic, which deteriorated further in Oct. If current trends persist, Reddit expects DAUs to decline low-double digits in 4Q.

Reddit is pivoting marketing investment toward app installs and planning to test a logged-in-only experience internationally in 4Q.

We would expect the transition to a logged-in user experience to last several quarters and impact headline traffic trends, but change could drive a higher quality, higher-monetization, user base and eliminate the Google traffic overhang (eBay is a good example of reducing Google traffic dependence).

Separately, KeyBanc Capital Markets analyst Justin Patterson cut the stock to sector weight from overweight, saying search traffic had become a bigger headwind than anticipated.

Citizens analyst Andrew Boone lowered his rating to market perform from market outperform after US user growth deteriorated and management warned that daily active users could fall by low double digits in the fourth quarter.

Bloomberg Intelligence analyst Mandeep Singh warned that the login shift could curb referrals from search engines and AI platforms.

What the Reddit CEO is saying (courtesy of Wall St Engine):

• "Google is crawling us as hard as ever."
• "The reality is the AI mode does not drive traffic. Not for us and not to anybody as far as I know."
• "It used to be a traffic driver. Now it's not."
• "People still want Reddit. It's just Google is not sending them to Reddit the way they used to."

CEO continued, saying Reddit isn't counting on Google's traffic returning:

• "We don't control Google. We only control Reddit."
• "Google is teaching people that if you want to come to Reddit, you need to come to Reddit."

Reddit shares are down 24% in premarket trading in New York, marking their largest intraday decline since they began trading in March 2024.

Wall Street analyst ratings compiled by Bloomberg:

Falling US user numbers spooked Wall Street because Reddit earns substantially more per user in the US than internationally.