Reddit's stock plummeted 29% on Friday, shedding over $7 billion in value as its shares dropped to $91.73. The decline came after the company warned that Google's AI-driven changes were significantly reducing traffic. Reddit CEO Steve Huffman acknowledged that Google's AI Mode, which provides direct answers, has slashed the number of users clicking through to Reddit by over 1 million per week.
Despite the traffic loss, Reddit's revenue surged 53% to $895 million in Q3, with earnings per share up 75% to $1.40. However, daily active users fell short of estimates, raising concerns about the company's ability to sustain growth without Google's referrals. Other platforms like People Inc., Tripadvisor, and Pinterest have also reported declines in Google-driven traffic, highlighting a broader industry shift.
Reddit's defense lies in its loyal user base, with over 80% of its revenue coming from logged-in and app users. The company also benefits from licensing deals with Google and OpenAI, which reportedly pay tens of millions annually to use Reddit's content for AI training. Yet, the stock's sharp drop underscores investor worries about the long-term impact of AI on traffic-dependent businesses.
Even after the crash, Reddit trades at a premium valuation of 19 times expected earnings, compared to Snap's 7.5. The next quarter's user metrics will be critical in determining whether Reddit can offset the loss of Google's clicks with its dedicated audience.