Reddit Shares Plunge 23% as Slowing User Growth and Weak Q4 Outlook Overshadow Strong Earnings

Reddit (NYSE:RDDT) shares plunged more than 23% in premarket trading on Friday after the social media platform issued disappointing fourth-quarter revenue guidance and warned that declining traffic from search engines could significantly affect user growth.

The sharp selloff came despite Reddit reporting third-quarter earnings and revenue above Wall Street expectations, supported by strong advertising growth and improved profitability.

At 04:39 ET (08:39 GMT), Reddit shares were trading more than 23% lower as investors assessed the impact of changes in online search behaviour, particularly the increasing use of artificial intelligence-generated search summaries.

Reddit reported adjusted earnings of $1.40 per share, exceeding the consensus estimate of $1.33. Quarterly revenue increased 53% year over year to $895 million, compared with analysts’ expectations of $874.9 million.

However, concerns about slowing user growth and weaker-than-expected revenue projections overshadowed the positive financial performance.

Reddit’s Fourth-Quarter Revenue Forecast Falls Below Expectations

Reddit forecast fourth-quarter revenue of between $1.00 billion and $1.03 billion, below the $1.05 billion expected by Wall Street at the midpoint of its guidance range.

The midpoint of $1.015 billion represents a shortfall of approximately 3.3% compared with analysts’ consensus estimate.

Although the forecast indicates that Reddit expects quarterly revenue to exceed $1 billion, the weaker outlook raised questions about the sustainability of its recent growth.

Investors were particularly concerned about the relationship between declining search referrals and the platform’s ability to attract new users.

Changes in how internet users discover information have become an increasingly important factor for Reddit, which has historically benefited from substantial traffic originating from search engines.

The company’s latest guidance suggests that these changes could create additional challenges during the final quarter of 2026.

Google AI Overviews Contribute to Declining Search Traffic

Reddit Chief Executive Steve Huffman warned in a shareholder letter that referral traffic from search engines declined significantly during the third quarter, with the deterioration accelerating towards the end of the period.

The company reported that search traffic fell by an average of more than 1 million referrals per week during October.

One of the main factors was the growing presence of Google’s AI Overviews, which provide AI-generated responses directly within search results.

These summaries can reduce the need for users to visit external websites, potentially limiting the traffic directed towards platforms such as Reddit.

The impact was particularly noticeable among US users accessing Reddit without logging into an account.

Search engines represent an important channel through which new users discover Reddit discussions and communities, making changes in referral patterns relevant to the company’s audience growth.

If the current trend continues, Reddit warned that daily active unique users could decline by a low-double-digit percentage during the fourth quarter from the current base of 130.3 million.

Such a decline would represent a significant reversal from the user growth recorded earlier in the year.

Daily Active User Growth Slows to 12%

Reddit reported that daily active unique users increased 12% during the third quarter, representing a slowdown of six percentage points compared with the previous quarter.

The deceleration reflected weaker performance among US logged-out users, who were particularly affected by reduced referrals from Google search results.

Although the platform continued to expand its overall audience, the slower growth raised concerns about its ability to maintain the pace of user acquisition.

Weekly active unique users increased 16% to 515.2 million, demonstrating that Reddit continued to attract a substantial global audience.

However, the contrast between strong weekly engagement and slowing daily user growth highlighted the challenges associated with converting occasional visitors into regular users.

The company is now seeking to reduce its reliance on external search traffic by encouraging more users to access Reddit directly through its application and registered accounts.

Jefferies Warns User Trends Could Limit Near-Term Share Performance

Analysts at Jefferies said Reddit’s strong financial performance was overshadowed by deteriorating user trends in the United States.

“RDDT’s delivery of strong Revenue/EBITDA growth (53%/70%) was overshadowed by worsening U.S. DAU declines, as increased prevalence of AI Overview negatively impacted referral traffic,” analyst John Colantuoni said.

The investment bank also expressed concern about the company’s growth outlook for the fourth quarter.

“Growth is also expected to slow in 4Q, which is likely to raise concern about sustainability. We think the stock could be rangebound near-term until a recovery in user trends emerges, but still like the long-term story as monetization upside helps drive peer-leading revenue growth,” Colantuoni added.

The comments reflected a distinction between Reddit’s strong advertising and profitability performance and the uncertainty surrounding future audience expansion.

Jefferies maintained a constructive longer-term view of Reddit’s monetisation opportunities, while acknowledging that weaker user growth could constrain the stock’s near-term performance.

Reddit Plans to Expand Logged-In Users and App Adoption

Reddit is responding to the decline in search referrals by focusing more heavily on users who access the platform through registered accounts and its mobile application.

Huffman said logged-in and app audiences account for more than 80% of Reddit’s monetisation, making these users particularly important to its advertising business.

The company plans to improve user retention, encourage greater adoption of its application and strengthen direct engagement with its communities.

During the fourth quarter, Reddit also intends to begin testing an experience primarily designed around logged-in users in selected markets outside the United States.

The strategy is intended to build a more consistent audience that relies less heavily on traffic from external search engines.

By increasing the proportion of users who visit Reddit directly, the company could potentially reduce its exposure to changes in search algorithms and AI-generated results.

However, the effectiveness of these initiatives will depend on whether Reddit can encourage more occasional visitors to become regular, registered users.

Advertising Revenue Rises 54% as Profitability Improves

Despite concerns about audience growth, Reddit’s advertising business continued to deliver substantial gains during the third quarter.

Advertising revenue increased 54% year over year to $847 million, remaining the company’s principal source of income.

The strong performance helped lift total quarterly revenue by 53% to $895 million.

Net income rose 74% to $283 million, representing a net profit margin of 32%.

Adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) increased 70% to $402 million, equivalent to a margin of 45%.

These results demonstrated continued improvements in Reddit’s ability to generate revenue and profits from its existing audience.

Huffman highlighted the platform’s differentiated content and community-driven discussions as important contributors to its financial performance.

“Our business is growing because the Reddit experience captures the human experience in a way that no other platform can replicate,” Huffman said.

He also noted that Reddit had generated more than $3 billion in revenue over the preceding twelve months, reflecting the platform’s growing commercial importance.

Reddit Forecasts Up to $510 Million in Q4 Adjusted EBITDA

For the fourth quarter, Reddit projected adjusted EBITDA of between $480 million and $510 million.

The guidance suggests that the company expects to maintain substantial operating profitability despite the challenges affecting audience growth.

Reddit also disclosed that it repurchased approximately 670,000 shares for $100 million during the third quarter.

The buyback formed part of the company’s capital allocation activity during a period of strong earnings and cash generation.

Investors will now focus on whether Reddit can maintain advertising revenue growth while addressing declining search referrals and slower daily user expansion.

The company’s ability to increase direct engagement, improve retention and expand its logged-in audience will be particularly important in determining its longer-term growth prospects.

Although third-quarter revenue, earnings and profitability exceeded expectations, the more than 23% premarket share price decline highlighted investor concerns about the potential impact of AI-driven changes in online search.

Reddit’s next challenge will be demonstrating that its advertising business can continue expanding even if search engines contribute fewer new visitors to the platform.

Reddit stock price