Reddit shares RDDT plunged more than 25% at market open on Friday after the social media company warned that user growth could weaken further in the fourth quarter as declining traffic from Google search weighs on its audience.
Chief Executive Steve Huffman said daily active unique visitors could fall by a low double-digit percentage in the current quarter from approximately 130 million if referral traffic continues to decline.
The warning overshadowed stronger-than-expected third-quarter results and a 53% increase in revenue.
The company also forecast fourth-quarter revenue of $1 billion to $1.03 billion, below the Bloomberg consensus estimate of $1.05 billion, raising concerns about whether its advertising business can maintain its growth momentum amid changes in online search.
The outlook prompted several analysts to reassess the stock, which has fallen 46% this year.
BofA Securities and Citizens downgraded their ratings, while Guggenheim and Needham retained Buy recommendations but substantially reduced their price targets.
Google’s AI search raises traffic concerns
Reddit has increasingly blamed changes to Google’s search experience for reducing the number of users directed to its platform.
AI-powered search features can answer queries directly, potentially limiting the need for users to click through to websites and online communities.
Huffman said search engine referrals to Reddit had declined by more than one million on average each week during October.
He also argued that Google’s AI search experience was failing to direct users to the platform despite continued crawling of its content.
“Google is crawling us as hard as ever, so the demand hasn’t changed from their point of view either. The reality is, the AI mode does not drive traffic, not for us and not to anybody,” Huffman said on the post-earnings call.
The company is responding by shifting its focus towards registered users and its mobile application.
On Thursday, Huffman outlined plans to require sign-ins for access to most content, partly to deter data scraping by artificial intelligence companies.
The strategy could help Reddit protect its data and improve advertising targeting, but it also carries the risk of reducing the number of casual visitors who access its communities through search engines.
Reddit’s global daily active uniques were flat quarter over quarter at 130.3 million in the third quarter, although they were up 12% from a year earlier.
In the US, daily active uniques fell to 50.7 million from 53.2 million in the second quarter, marking a 2% year-over-year decline.
The US decline is particularly significant because it represents the first annual contraction in the metric since Reddit went public in 2024.
Huffman sought to emphasise that the company’s most valuable audience remained intact.
“The vast majority of our revenue comes from our app users and logged-in users are direct traffic, and both of those are up Q. over Q., and so that’s where our focus is,” he said.
Reddit generates most of its revenue from online advertising and can monetise registered users more effectively because they tend to be more active and provide advertisers with better opportunities for targeted campaigns.
Strong third-quarter results fail to reassure investors
Reddit reported third-quarter revenue of $895 million, up 53% year over year and above the Bloomberg consensus estimate of $869.6 million.
Net income climbed to $283 million, or $1.40 per diluted share, compared with analyst expectations of $272.6 million.
Adjusted EBITDA increased 70% to $402 million, exceeding the $398.5 million estimate.
However, the latest revenue growth marked a slowdown from the company’s previous performance.
Reddit had reported eight consecutive quarters of revenue growth exceeding 60% as recently as its second-quarter results in July.
The weaker growth trajectory, combined with the user figures and fourth-quarter forecast, raised questions about whether the company can sustain its rapid expansion.
Huffman described the revenue outlook as resilient despite the pressure on search traffic.
“It’s still a strong guide,” he said. “We are still growing at an industry-leading rate, and that’s despite the headwinds from search referrals.”
Analysts cut price targets as outlook deteriorates
BofA Securities lowered its price target on Reddit to $135 from $190 while maintaining a Neutral rating.
Reddit stock closed at $129 per share on Thursday.
The firm expects investor sentiment to remain subdued for several quarters until the company establishes a positive trajectory for US logged-in user growth, which has been challenging since 2024.
BofA also warned that traffic headwinds could intensify before improving and highlighted uncertainty surrounding Reddit’s planned transition towards a logged-in-only experience.
The firm cited the renewal of the company’s Google data licensing agreement in the first quarter of 2027 as another source of uncertainty.
At an after-hours share price of $106, BofA valued Reddit at nine times its estimated 2027 EBITDA and seven times its 2028 EBITDA, broadly in line with peers despite higher revenue growth expectations.
Citizens downgraded Reddit to Market Perform from Market Outperform, citing declining user growth and reduced referrals from Google.
Analyst Andrew Boone noted that US daily active users had fallen 5% quarter over quarter and warned that Google’s push towards AI-powered search could worsen the platform’s logged-out traffic problems.
Citizens acknowledged that Reddit continued to execute well on monetisation but said uncertainty surrounding user growth was putting greater pressure on its ability to generate revenue from existing users.
The firm believes the shares are now fairly valued.
Guggenheim cut its price target to $170 from $255 while maintaining a Buy rating.
It reduced the valuation multiple applied to its 2027 operating income before depreciation and amortisation estimate to 18 times from 25 times, citing investor concerns over referral traffic and the shift towards registered users.
Needham also retained its Buy rating but lowered its price target sharply to $150 from $300.
The firm said Reddit’s focus on logged-in and app users, which accounted for more than 80% of third-quarter revenue, could reduce customer churn, improve advertising targeting and protect company data from large language models.
Needham said one negative interpretation of management’s commentary was that Reddit might not renew its Gemini large language model deal.
However, it argued that platforms with more restricted access to their audiences could ultimately monetise users more effectively than companies dependent on the open internet.
The diverging analyst views reflect the central question facing Reddit: whether its strategy of prioritising registered users can offset the loss of search-driven visitors without undermining the audience growth that has supported its advertising business.
The post Reddit stock plunges 25% on user growth concerns; analysts turn cautious appeared first on Invezz