Why Is Reddit Stock Falling After Beating Earnings Expectations?

Key takeaways

• Reddit shares fell nearly 18% in after-hours trading despite beating Q3 earnings expectations
• Google's AI-powered search features contributed to declining referral traffic
• Reddit's disappointing Q4 revenue guidance and slower user growth overshadowed strong profits

Reddit shares plunged by almost 18% in after-hours trading on Oct. 29, despite the social media platform reporting stronger-than-expected third-quarter earnings. Concerns about slowing user growth, weaker-than-expected revenue guidance, and declining traffic from Google's AI-powered search features overshadowed the company's impressive financial performance.

The stock fell to approximately $106.50 in extended trading after closing the regular session at $129.60.

<iframe src=”https://widgets.coincodex.com/w/df4cc534-6083-481e-bf3a-d22b37f07c5b?site=coinpaper&mode=light” width=”100%” height=”420” frameborder=”0” referrerpolicy=”no-referrer-when-downgrade” style=”border:0;background:transparent;border-radius:0px;”></iframe>Reddit Earnings Beat Wall Street Expectations

Reddit reported third-quarter revenue of $895 million, which is a 53% increase from the previous year and exceeding analysts' expectations of approximately $875 million to $878 million. Advertising revenue surged 54% to $847 million, while net income jumped 74% to $283 million. Earnings per share reached $1.40, comfortably exceeding Wall Street forecasts.

(Source: investor.redditinc.com)

The company also generated $363 million in free cash flow, nearly doubling the previous year's figure.

Despite these gains, Reddit's fourth-quarter outlook disappointed investors. Management projected revenue between $1 billion and $1.03 billion, falling short of analysts' expectations of approximately $1.04 billion.

Google's AI Search Raises Concerns About Reddit's Future

One of the biggest concerns emerged from CEO Steve Huffman's comments about Google's AI-powered search products. Huffman revealed that referrals from Google Search declined by more than one million per week during October. This raised serious questions about how AI-generated answers could affect Reddit's long-term traffic.

Google's AI Overviews and AI Mode provide answers directly within search results, which potentially reduces the need for users to visit external websites.

Meanwhile, Reddit's daily active users increased 12% year over year to 130.3 million, which also fell short of analysts' expectations of approximately 134 million. US daily active users declined 2%.

What Comes Next for Reddit Stock?

Reddit is exploring ways to reduce its dependence on Google, including testing login requirements in selected international markets to encourage more direct engagement.

Investors are also monitoring Reddit's AI data-licensing agreements with companies like Google and OpenAI, which could become very important as AI companies seek access to human-generated content.

Although Reddit delivered strong revenue growth and profitability, its latest earnings prove that there are still some growing concerns about user acquisition and future expansion.