Reddit posts a strong quarter but spooks investors over AI's impact on search traffic

Reddit reported a strong second quarter but spooked investors by mentioning in an investor letter that traffic from search engines had grown "choppy." The stock slid over 10% in after-hours trading despite beating expectations.

The numbers were solid: total revenue of $805 million jumped 61% year over year, and net income of $253 million was up 183%, both beating Wall Street's expectations. The company also guided to revenue of $860 million to $870 million with healthy earnings before taxes next quarter, ahead of estimates.

Normally, telling investors to expect even better results would lift a stock. The culprit was CEO Steve Huffman's warning in his letter to shareholders: "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."

AI is clearly changing the search engine landscape, and investors seem to fear that Reddit's traffic may suffer. In 2024, Reddit signed a contract to provide its content to Google for AI training; now Google's deployment of AI summaries appears to be peeling away audience share, and Reddit has signaled it is unsure whether it will renew the partnership.

User data added to the concern: global users are up, but U.S. daily active uniques slipped slightly to 53.2 million from 53.5 million in Q1. During Thursday's earnings call, one analyst pressed the point: "Your stock is down sharply because there is just a sense from investors that you have a user problem, especially in the U.S."

Analysts argued that as search shifts to AI, logged-out traffic will come under pressure, referrals will dry up, and it will be harder to convert logged-out users into logged-in ones. One analyst asked Huffman directly: "Do you see any world where you're not licensing data to Google and OpenAI next year?"

Huffman replied that Reddit is "communities and conversation," and that communities are universal — but on Google he was vaguer: "Our relationship with them actually predates the formal kind of data licensing agreements… I don't think there's a binary outcome… we will make sure that we're maximizing the value for Reddit."

Content platforms and AI search engines are entering a renegotiation period: they depend on data-licensing revenue from AI companies on one hand, while fearing that AI summaries will take away their traffic on the other. Whether Reddit renews its Google data deal will be a key signal for how that standoff plays out.