What Happened?
Shares of online community and discussion platform Reddit (NYSE:RDDT) fell 23.2% in the morning session after the company’s strong second-quarter earnings report and robust forward guidance were overshadowed by concerns that changes to Google’s AI search could alter the path of its user traffic and growth.
Reddit delivered revenue of $804.9 million, a 61.1% year-over-year increase which handily beat expectations. Profitability followed suit, with EBITDA coming in well above consensus estimates.
Looking ahead, guidance for both revenue and EBITDA in the next quarter similarly beat Wall Street’s estimates, making for a very solid quarter. However, the company’s stock still fell sharply. The main concern for investors was a comment from CEO Steve Huffman’s that search referrals had become “choppy” during the quarter. This sparked further anxiety around Reddit’s relationship with Google, which is multi-faceted.
There is an ongoing renegotiation of a contract for Google to use Reddit’s human-generated data to train its LLMs, which involves discussions of rethinking how Google will pay Reddit for increasingly valuable data.
There is also uncertainty around how users will find Reddit as Google increasingly uses AI-generated summaries instead of traditional search links. It seems the market was overlooking strong quarterly results to fret about what ultimately happens with Google.
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What Is The Market Telling Us
Reddit’s shares are extremely volatile and have had 53 moves greater than 5% over the last year. But moves this big are rare even for Reddit and indicate this news significantly impacted the market’s perception of the business.
The previous big move we wrote about was 9 days ago when the stock dropped 5.9% on the news that reports revealed the company is reconsidering its AI data-licensing agreement with Google. The Wall Street Journal reported that Reddit executives are reevaluating their $60 million-a-year licensing deal with Google, which was signed in 2024. While the agreement allows Google to train its models on Reddit’s vast library of human-generated content, the integration of Google’s “AI Overviews” has complicated the relationship, as it hurts Reddit’s core business by answering user queries directly on the search page, reducing click-through traffic to the platform.
As the two companies enter a standoff over contract renewals, investors grew anxious about the potential loss of this high-margin AI revenue stream. While Reddit depends on Google for traffic, the leverage doesn’t just lie with the search giant. Reddit’s vast repository of human content, which boasts high trust among consumers and high commercial intent that is coveted by advertisers, is increasingly valuable for AI training in world increasingly dominated by AI-generated content (aka “slop”). Google is further incentivized to sign a deal with Reddit to keep Reddit’s data out of the hands of key competitors also looking to train their AI models.
