Reddit shares fall 23% as company warns of fourth-quarter decline in daily active visitors
Key Facts
Reddit shares fell 23% in premarket trading on October 30 after the company warned that total daily active visitors could decline by a low double-digit percentage in the fourth quarter if search engine referrals continue to fall. The comparison is based on a third-quarter daily active visitor base of about 130 million, making the warning a signal of potential pressure on the platform’s growth in the coming period. The company said search engine referrals fell by an average of more than one million a week during October. The warning came alongside strong quarterly results, with revenue rising and exceeding analysts’ estimates. But the share price move reflected investors’ focus on the trajectory of users and future revenue after the results were released.
The company reported third-quarter revenue of $895 million, up 53% year over year, compared with analysts’ estimate of $874.9 million. It also posted adjusted earnings per share of $1.40, above the consensus forecast of $1.33. But revenue growth was not matched by the same acceleration in daily active visitor growth; that metric rose 12% in the third quarter, slowing by 6 percentage points from the previous quarter. This highlights a divergence between results for the period that ended and audience growth indicators that will determine the company’s ability to continue expanding. According to coverage published after the results, visitor growth had slowed before the warning of a possible decline in the total number in the fourth quarter.
Most revenue came from advertising, which rose 54% to $847 million in the third quarter, while other revenue increased 35% to $48 million. U.S. revenue rose 50% to $719 million, while international revenue grew 67% to $176 million. On an adjusted operating profitability basis, Reddit reported earnings before interest, taxes, depreciation and amortization of $402 million, equal to 45% of revenue, compared with $236 million in the same period a year earlier. Gross margin was 91.5%, versus 91.0% a year earlier. These figures show continued revenue growth and improved profitability metrics, alongside slowing visitor growth momentum and increasing reliance on the channels through which users are acquired.
The company said search engine referrals to Reddit fell by an average of more than one million a week during October. Chief Executive Steve Huffman said Google was still crawling Reddit at the same rate, but said that “AI Mode is not bringing traffic, to us or to anyone else.” JPMorgan analysts attributed the pressure on search traffic to the expansion of Google’s AI-powered summaries and AI Mode, as well as changes to the ranking of machine-translated content. This places the weakness in referrals in the context of changes in how search results are presented, at a time when Reddit relies on users arriving from outside its app. These developments are particularly significant because the company’s warning about fourth-quarter visitors depends on the downward trend in referrals continuing.
Reddit plans to test an experience limited to logged-in users in selected markets outside the United States during the fourth quarter, then assess its impact before any wider rollout. The move changes access to browsing, as the platform had allowed anyone to browse Reddit without an account for two decades. Huffman said logged-in users account for more than 80% of monetization, illustrating the link between increased registration and the platform’s commercial returns. Reuters reported that the shift also aims to deter automated data collection; the company has not attributed an announced goal of measuring that effect to the test itself. The test comes as the company faces a decline in search referrals and seeks to assess the impact of making registration a requirement for browsing in selected markets.
In the market reaction, shares fell 23% in premarket trading on October 30, after closing at $129.6 the previous day. Piper Sandler analysts said the near-term outlook was becoming more uncertain and that “a reset in expectations is appropriate.” Reddit shares had fallen about 44% year to date through the October 29 close. Reuters estimated that the company could lose $5.7 billion in market value if the share losses recorded at the time of the report continued. On costs and technology infrastructure, Reddit extended its cloud services agreements with AWS and Google through 2029, and committed to spending $880 million with AWS and $580 million with Google over three years.
This puts the financial guidance alongside the company’s warning of a possible decline in daily active visitors if referral weakness continues. The test of browsing that requires users to log in is scheduled to begin in selected markets outside the United States during the fourth quarter. Reddit will assess the experiment’s impact before considering a wider rollout, while search traffic and user growth remain among the company’s main challenges in the coming period.