Reddit Stock Fell 25% on AI Fears – Despite Strong Quarterly Results
The company beat estimates on both revenue and earnings in the third quarter – yet the stock fell roughly 25% on Friday, October 30, on track for the biggest one-day drop in its history. The backdrop: search traffic from Google is falling by more than one million referrals per week, and Reddit is responding by testing a mandatory login in international markets before the end of the year.
Reddit announced in its quarterly report, published Thursday, October 29 after the market closed, that it will move to requiring all users to log in, and that it will begin testing this in international markets before the end of the year, according to MarketWatch via MSN. On Friday, October 30, the stock fell 25% to $96.85, a decline of 44% year to date. If the price holds, it will be the company's largest percentage drop in a single day ever and its lowest closing price in more than a year, according to Dow Jones Market Data cited by MarketWatch.
Strong numbers, weak user numbers
The paradox is that the report was fundamentally good. Third-quarter revenue rose 53% year over year to $895 million, beating analysts' expectations, which according to Yahoo Finance/24/7 Wall St. stood at $874.9 million. Net income rose 74% to $283 million, and earnings per share of $1.40 came in better than analysts' forecasts – estimates from various sources range between $1.33 and $1.35.
The problem was on the user side and in the outlook. Daily active unique users rose 12% year over year to 130 million, but fell short of the expected 133.7 million. In the U.S., the figure dropped 2% to 50.7 million, according to MarketWatch. CFO Drew Vollero said in the follow-up call that Reddit is targeting revenue of between $1 and $1.03 billion in the fourth quarter – growth of 38–42%, but below Wall Street's estimate of $1.05 billion.
The traffic decline driving the strategy
Reddit's own explanation lies in the shareholder letter cited by Mashable: Search traffic fell measurably in the third quarter, with a decline that accelerated over the course of the quarter, the company writes. The effect was largest on logged-out and web-based visitors, but some of it also flows through to logged-in and app users, since search is a common source of re-engagement. The declines have continued into the fourth quarter: according to the letter, search traffic in October has fallen by more than one million referrals on average per week. CEO Steve Huffman said on the earnings call that if the trend continues, daily unique visitors could fall by a low double-digit percentage this quarter, from a starting point of 130 million.
Huffman points to Google's AI Overviews and AI Mode, which answer searches without sending users on to Reddit. According to Yahoo Finance, he said, among other things, that web search is evolving from a gateway – the statement is only partially reproduced in the sources, and the full wording cannot be verified. Huffman told CNBC that the relationship between Google and the rest of the internet is changing, and that for Reddit this means a continued focus on its core of users who come directly to the site.
It is worth noting that the company's own materials describe broader changes in search, so the entire traffic decline cannot be attributed to AI alone.
Why a login wall?
The logic is threefold, as the coverage describes it. First, a wall makes it harder for unauthorized actors to scrape content – according to Gadget Review via Yahoo Finance, Reddit has sued Anthropic, Perplexity AI and several scraping companies, while the company licenses its content to OpenAI and Google. Second, it converts direct traffic into registered users, who are easier to retain and monetize than anonymous Google visitors. Third, logged-in users give Reddit better control over its own data – an asset the company already sells.
Part of a broader AI-fear selloff
The Reddit decline came amid a broader market downturn driven by AI concerns, with the Nasdaq down 2%. Alphabet lost more than $500 billion in market value on Thursday – its worst one-day drop ever – after admitting that AI chatbot search is eating into its traditional search business, according to MSN. The irony is clear: Google's AI shifts are partly hitting Reddit, and the market punished both in the same move.
What remains unresolved
Several central questions remain open. Reddit has not set any fixed global timeline for the login model, and the company has not specified which content will remain visible to logged-out visitors, according to Gadget Review via Yahoo Finance. The scope of any further rollout depends entirely on what the test markets show. And the biggest question – whether a login wall actually improves the economics of data licensing and reverses the traffic decline – is unanswered. It is the test markets that will provide the answer.