Key points
- Why Reddit's fourth-quarter forecast fell short
- What Reddit said about its October search referrals
- What Reddit's login test means for logged-out visitors
Reddit (RDDT) beat third-quarter estimates on Thursday but forecast fourth-quarter revenue below what Wall Street expected. The company also warned that shrinking search traffic could cut its daily users by a low-double-digit percentage this quarter. The shares fell 18.2% to $106 in after-hours trading as of 8 p.m. ET.
Revenue rose 53% to $895 million, and earnings came to $1.40 a share. Analysts had expected $878 million and $1.35, according to LSEG estimates compiled by CNBC. For the fourth quarter, Reddit guided to revenue of $1 billion to $1.03 billion, below the $1.05 billion analysts were looking for.
Reddit also said it will start testing a login requirement. CEO Steve Huffman told CNBC that search referral traffic was "down meaningfully in this quarter" and blamed Google's "shift to AI mode and AI overviews." Reddit shares had closed down 3.8% at $129.60 in regular trading on Thursday, October 29, before the results came out.
How much search traffic is Reddit losing?
A lot, and the pace picked up late in the quarter. Reddit's search referral traffic was "down meaningfully in Q3, with the decline accelerating later in the quarter," the company said in its shareholder letter, which it filed with the SEC.
The drop kept going after September. "During October, we have seen that search traffic has dropped by more than 1 million referrals on average per week," the letter said.
Reddit counts its audience in daily active uniques, or DAUq, its measure of how many people visit on an average day. If October's pace continues, Reddit said, DAUq could fall by a low-double-digit percentage in the fourth quarter from its current base of 130 million.
The third-quarter user numbers already came in light. Third-quarter DAUq rose 12% to 130.3 million worldwide, short of the 133.7 million analysts expected. US DAUq fell 2% from a year earlier to 50.7 million, down from 53.2 million in the second quarter, TechCrunch reported. The letter said the biggest hit landed on logged-out visitors and web traffic.
Why does Reddit's warning matter for Google?
Google says people are searching more than ever. Alphabet (GOOGL) reported this week that Google searches grew at their fastest year-over-year rate in five years. We argued Thursday morning that AI could be taking bits of Google's search revenue, even while Google keeps the searches.
Reddit's numbers show the other end of that: the clicks Google sends out to other sites. Huffman said earlier Google algorithm changes would "kind of come and go." AI is different, he told CNBC. It's "a fundamental shift in how the Google product works, from being a traffic driver to whatever's going on now."
That's one company's traffic, not the whole web. But Reddit has long drawn millions of visitors through Google, and many people add the word "Reddit" to their searches to find answers from real users. If more people get an AI summary instead, they may have less reason to click through to Reddit.
What changes for people who don't log in?
Reddit plans to shift to a "logged-in-only experience," the letter said. Testing starts in the fourth quarter in select markets outside the US. Reddit gave several reasons: logged-in users give it more signals for ad targeting, they tend to be more engaged, and a login wall protects access to its data.
Huffman told CNBC there is no timing yet for a wider rollout. Reddit is still deciding what logged-out visitors will be able to see. "Reddit is the last platform to provide basically unfettered logged-out access, and that's largely because of me, I've been holding that line," he said.
The users Reddit wants to keep are already growing. Logged-in and app DAUq rose from the second quarter in both the US and the rest of the world, and they account for over 80% of Reddit's monetization, according to the letter. One detail in the letter stood out: only about 13% of eligible mobile web users currently see Reddit's prompt to switch to the app. That leaves Reddit plenty of room to push more of them.
What about Reddit's data deals with Google?
Reddit's other revenue, which includes its AI data-licensing business, rose 35% to $48 million. OpenAI and Google are its two biggest licensing partners. Huffman said Reddit remains "in negotiations" with Google over its agreement and is "only going to do a deal that makes sense for Reddit." We looked in September at what the Justice Department's support for OpenAI could mean for licensing deals like Reddit's.
Advertising still does most of the work. Ad revenue grew 54% to $847 million, and net income rose 74% to $283 million. For the fourth quarter, Reddit expects adjusted EBITDA of $480 million to $510 million.
