Reddit reports a solid quarter but shows signs of AI’s impact

Reddit just posted a quarter that should have sent its stock soaring. Revenue jumped 61 percent to $805 million. Net income nearly tripled to $253 million. Guidance for the next quarter beat expectations. Yet shares cratered more than 10 percent in after-hours trading.

The disconnect is not a mystery. In a separate letter to shareholders, CEO Steve Huffman admitted that search referrals turned "choppy" and traffic grew volatile late in the quarter. That single admission outweighed every gaudy number in the earnings release. Investors heard a warning: the search engine pipeline that feeds Reddit's logged-out audience is fracturing.

AI is the fracture. Google's AI Overviews now summarize Reddit threads directly on the results page, stripping away the click that used to land a user on the site. The same dynamic threatens Bing and every other engine experimenting with generative answers. Reddit's content becomes raw material for someone else's product, and the referral traffic that once converted lurkers into logged-in members evaporates.

The numbers already show the strain. U.S. daily active uniques slipped from 53.5 million to 53.2 million quarter over quarter — a hairline decline, but the first one in memory. Global users still grew, yet the domestic base is where advertising dollars concentrate. A shrinking U.S. logged-out pool means fewer conversion candidates, higher acquisition costs, and a ceiling on the revenue per user that Wall Street models assume will keep expanding.

Analysts on the earnings call did not mince words. One called it a "user problem" and asked bluntly whether Reddit sees any world where it stops licensing data to Google and OpenAI next year. Huffman dodged the binary. He leaned on the "human aspect" of communities as a moat, arguing that conversation is universal and Reddit's job is simply to reveal it. That is a comforting narrative, but it ignores the mechanical reality: if the front door — search — swings shut, the community inside never gets discovered.

The Google relationship is the elephant in the room. Reddit signed a data-licensing deal in 2024 that reportedly pays $60 million a year. Now Google's AI summaries compete directly with the source. Huffman said the partnership "predates the formal kind of data licensing agreements" and insisted there is no binary outcome. Translation: Reddit wants leverage but lacks a walk-away plan. If the traffic bleed continues, the licensing fee will look less like revenue and more like a bribe to the executioner.

Reddit's own AI ambitions — the Answers product, the nascent search tool — are still embryonic. They cannot yet replace the inbound firehose that Google provides. The company is effectively betting that its community gravity will overcome distribution physics. History suggests otherwise: platforms that lose the top-of-funnel rarely recover it by building a better product. They recover it by owning a new funnel.

The stock market's reaction is rational. It priced Reddit as a search-dependent media company with a high-margin ad business. The moment that dependency looked fragile, the multiple compressed. No amount of revenue beat can fix a structural threat to the top of the funnel. The "choppy" adjective was the pin that popped the balloon.

What happens next? Reddit must either renegotiate data deals with teeth — revenue-sharing tied to referral guarantees — or build a proprietary discovery layer that bypasses search entirely. The latter means investing heavily in its own search and recommendation stack, a costly pivot for a company that has historically outsourced discovery. The former requires Google to concede value it has no incentive to surrender.

The irony is that Reddit's content quality has never been higher. The platform's moderation tools, its niche communities, its real-time discourse during breaking events — all of that remains a unique asset. But uniqueness does not guarantee distribution. In an AI-mediated web, the best content can become the best training data, and the best training data can become the best answer that never links back. Reddit is learning that lesson in real time.

Shareholders should watch two metrics in the next letter: U.S. logged-out uniques and the renewal language around the Google deal. If the former keeps drifting down and the latter turns vague, the "choppy" quarter becomes a choppy era. The market has already voted. Reddit now has to prove the vote wrong.