Reddit Tumbles 23% Premarket to Fall Below $100, Down Over 60% From 52-Week High as Search Traffic Crisis Deepens

TradingKey - On October 30, Reddit (RDDT) shares plummeted about 23% in pre-market trading to below $100, representing a cumulative pullback of about 62% from its 52-week high of $263.5. Although the company's third-quarter revenue and earnings both exceeded market expectations, investors focused their attention on lower-than-expected fourth-quarter guidance, a continuous decline in search engine referral traffic, and a potential marked slowdown in user growth.

Source: TradingView

Reddit's third-quarter revenue grew 53% year-over-year to $895 million, exceeding market expectations of approximately $875 million. Among this, advertising revenue grew 54% to $847 million, while other business revenue increased 35% to $48 million. Net income reached $283 million, with diluted earnings per share at $1.40, up 75% year-over-year; adjusted EBITDA grew 70% to $402 million, with a margin of 45%.

However, strong current-period results failed to offset the pressure from a weakening growth outlook. Reddit expects fourth-quarter revenue of $1 billion to $1.03 billion, with a midpoint of about $1.015 billion, roughly 3% below Wall Street's expectation of $1.05 billion. With the stock price previously reflecting higher growth expectations, any sign of a slowdown in user or revenue growth could trigger a significant valuation adjustment.

Adding to market concerns is the continuous decline in traffic from search engines. CEO Steve Huffman stated that search referral traffic fell significantly in the third quarter and accelerated further toward the end of the quarter. Entering October, referral traffic from search engines decreased by an average of more than 1 million visits per week, with logged-out web users being the most affected. If this trend continues, daily active unique users in the fourth quarter could fall by a low double-digit percentage from the current level of approximately 130 million.

In the third quarter, Reddit's daily active unique users grew 12% year-over-year to 130.3 million, with international users increasing by 24% but U.S. users declining 2%; weekly active unique users rose 16% to 515.2 million. The data indicate that while the platform's overall scale is still expanding, growth is increasingly reliant on international markets, making U.S. user performance and declining search referral traffic clear weaknesses.

Meanwhile, as search engines like Google directly provide AI-generated answers, users can obtain information without clicking on external links, putting pressure on Reddit's traffic from traditional search. Although Reddit has signed content licensing agreements with Google and OpenAI, uncertainty remains over whether the associated revenue can offset the impact of reduced traffic on advertising and user growth.

To reduce its reliance on search engines, Reddit plans to test a logged-in-centric user experience in select markets outside the U.S. in the fourth quarter. The company aims to boost user retention and app usage while strengthening ad targeting capabilities and protecting platform data. Management stated that logged-in and app users contribute more than 80% of the platform's commercial revenue, making it meaningful long term to increase the proportion of these high-value users.

However, this transition could also bring short-term risks. Requiring more visitors to log in may raise the barrier to entry for new users and further depress conversion rates from search engines. The market worries that, with search referrals already declining, login restrictions could put even greater pressure on user growth.

Following the earnings report, KeyBanc downgraded Reddit's rating from "Overweight" to "Sector Weight," believing the impact from search traffic is larger than previously expected; Citizens also downgraded its rating from "Outperform" to "Market Perform," pointing to a quarter-over-quarter slowdown in U.S. daily active users.