Reddit’s stock plunged on Friday after the community discussion forum said its search referral traffic was down significantly in the third quarter. Analysts say the company’s new plan to shift to a logged-in user experience is likely to take time — and will probably continue to affect revenue in the process.
Shares in the company nicknamed “the front page of the internet” tumbled 25% to $96.85, with the decline at 44% since the start of the year. If the stock continues on this trajectory, it will mark its largest ever one-day percentage decrease and the lowest closing price in over a year, according to Dow Jones Market Data.
Co-founder and CEO Steve Huffman told investors in the company’s earnings call on Thursday that search traffic dropped by over 1 million referrals on average each week in October. He said that if this trend continues the number of daily active unique visitors to the website could decline by a low double-digit percentage in the current quarter compared with the previous one with a base of 130 million.
Reddit also announced that daily active unique users climbed 12% on a year-on-year basis to 130 million, lower than the projected 133.7 million. In the U.S., it slipped by 2% to 50.7 million, below an expected 53.5 million.
The company revealed that it would shift to requiring all users to log in, an effort it said it will begin trialing in international markets before the end of the year.
For analysts at JPMorgan, led by Doug Anmuth, this is an important move to decrease Reddit’s reliance on Google search and will help to improve personalization for members. They noted, however, that it likely will take time to fully implement the change.
“As the Google agreement approaches its 2027 expiration, the main question remains around licensing economics and AI platforms’ limited incentives to drive traffic back to Reddit,” analyst at Bernstein, headed by Mark Schmulik, said. “Can switching to logged-in only further gate the Reddit data? And does that drive any change in data licensing economics?”
The social-media platform posted revenue of $895 million, a rise of 53% from a year before and higher than analysts’ consensus expectation of $878 million, according to the London Stock Exchange Group. Its earnings per share also surpassed consensus, with $1.40 posted, versus 80 cents a year ago and the $1.35 that was projected.
Drew Vollero, chief financial officer, said in the post-earnings-report conference call that Reddit is targeting revenue of between $1 billion and $1.03 billion in the fourth quarter, representing 38% to 42% growth from the same quarter of the previous year, but its figure was below a Wall Street estimate of $1.05 billion.
For Joseph Barker and Dominic Ball at Rothschild, the company’s disappointing outlook is now putting downgrades to near-term estimates in focus.
The reflection of weaker user engagement in revenue growth doesn’t happen immediately, they wrote in a Friday note. While Reddit may have benefited from this lag as its revenue was improving, the lower-than-expected forecast and drop in daily active uniques in the U.S. suggests the opposite is occurring, the analysts said.
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