SKN | Reddit Shares Plunge 30% as Google’s AI Search Threatens Traffic and User Growth

Key Points:

• Reddit shares fall 30.44%: The stock dropped to $90.15 on Friday despite strong third-quarter financial results, following concerns about its revenue outlook and user growth.
• Google search referrals decline: CEO Steve Huffman said referrals from Google fell by more than one million on average each week during October, raising concerns about the impact of AI-powered search.
• U.S. daily users contract: Reddit reported 130.3 million daily active unique visitors, up 12% year over year, but U.S. daily users declined 2% to 50.7 million.

Reddit shares plunged 30.44% to $90.15 on Friday after Chief Executive Officer Steve Huffman warned that Google’s artificial intelligence-powered search features were reducing referral traffic and potentially threatening the platform’s user growth. The selloff followed a quarter of strong revenue and earnings, illustrating how concerns about AI-driven changes to internet search can outweigh positive financial results when investors reassess a company’s long-term growth prospects.

The development highlights a broader challenge for advertising-supported digital platforms: as search engines increasingly provide direct answers through AI-generated summaries, fewer users may click through to the websites that originally produced the information. For Reddit, where search referrals have historically played an important role in audience acquisition, this shift could affect both advertising reach and future monetization.

Strong Financial Results Fail to Offset Growth Concerns

Reddit’s third-quarter financial performance initially appeared strong. Revenue increased 53% year over year to $895 million, while advertising revenue climbed 54% to $847 million. Net income reached $283 million, and diluted earnings per share rose 75% to $1.40, exceeding the analyst consensus of $1.33.

However, audience growth presented a less favorable picture. The company reported 130.3 million daily active unique visitors, representing 12% annual growth but falling short of analyst expectations of approximately 134 million. More importantly, U.S. daily active unique visitors declined 2% to 50.7 million.

The contrast between improving profitability and weaker audience indicators became a central concern for investors. Reddit’s advertising business depends heavily on its ability to attract and retain users, making sustained engagement and audience expansion important drivers of future revenue.

Google’s AI Search Features Change Referral Economics

During Thursday’s earnings call, Huffman said Google search referrals had declined by an average of more than one million per week during October, with the deterioration accelerating toward the end of the third quarter. He warned that, if the trend continued, Reddit’s total daily active users could decline by a low double-digit percentage in the fourth quarter from its current base of approximately 130 million.

Huffman specifically identified Google’s AI Overviews and AI Mode as contributing factors. These features generate summaries and direct answers within search results, potentially reducing the need for users to visit external websites to obtain information.

For Reddit, this creates a structural challenge. Users may still search for discussions hosted on the platform, but AI-generated results can allow them to consume information without clicking through. Huffman said AI Mode was not generating meaningful referral traffic, either for Reddit or, in his assessment, for other websites.

The potential consequences extend beyond immediate website visits. Search referrals can introduce new users to Reddit and bring existing users back to its discussions. A sustained reduction could therefore affect audience acquisition, engagement and the advertising opportunities built around those visits.

AI Search Creates a Broader Challenge for Digital Advertising

Reddit’s experience illustrates how AI-powered search could redistribute value across the internet. Search engines have traditionally directed users toward publishers, discussion platforms and other websites. AI-generated answers increasingly place the information itself inside the search interface, potentially weakening the referral model on which many advertising-supported businesses depend.

For investors, the central issue is whether platforms such as Reddit can maintain audience growth and advertising performance as discovery patterns change. Strong quarterly earnings demonstrate current monetization capacity, but they do not necessarily resolve concerns about future traffic acquisition.

Looking ahead, attention will focus on Reddit’s fourth-quarter user guidance, the pace of Google referral declines and the company’s ability to develop alternative discovery channels. The possibility of a low double-digit percentage decline in daily active users represents a significant risk if the current trend persists. More broadly, the market will be watching whether AI search becomes a structural challenge to advertising-supported websites or encourages platforms to develop new distribution and monetization strategies.