Reddit Shares Dip After User Growth Misses Expectations

Reddit Inc.'s shares experienced a decline in after-hours trading following the announcement of fourth-quarter user growth that fell short of market expectations. This indicates potential difficulties for the recently public company in competing with industry giants such as Meta Platforms Inc. and Google.

Missed User Growth Projections

During the reporting period, Reddit averaged 101.7 million daily active unique visitors, as disclosed in a statement on Wednesday. This figure fell below analysts' average forecast of 103.8 million. Reddit attributed this slower user growth to an algorithm adjustment by Google that impacted search traffic.

In recent years, Alphabet Inc.'s Google has been responsible for up to half of Reddit's daily traffic, making the social media platform vulnerable to changes implemented by the leading search engine.

"Google algorithm changes happen," noted Steve Huffman, Reddit's Chief Executive Officer, during an interview. He emphasized that the impact was primarily observed in the US among users who were not logged into Reddit's platform. He also mentioned that the company has already witnessed improvements in the first quarter.

Financial Highlights

Despite the user growth miss, Reddit's revenue for the holiday quarter surged by 71% to $427.7 million for the period ending in December. This surpassed the average analyst estimate of $405 million, according to a Bloomberg survey. Net income increased to $71 million, or 36 cents per share.

For the current quarter, the company projected revenue between $360 million and $370 million, exceeding the average analyst estimate of $359 million.

Competitive Landscape and Innovations

San Francisco-based Reddit has been investing heavily in advertising technology to enhance its competitiveness with Google and Meta, which dominate the global advertising market. Over the past year, Reddit unveiled several new ad formats, such as shopping and video ads, and established content partnerships with major sports leagues to attract advertisers. The social media platform has also focused on acquiring more small- and medium-sized advertisers, as well as international marketers.

Additionally, Reddit has been forging partnerships with artificial intelligence companies to expand its business beyond advertising. Last year, Reddit entered into data-licensing agreements worth $203 million with partners including Google and OpenAI. Wall Street anticipates additional deals in this area as companies employing large language models seek to train their models on extensive data repositories.

"We're still in the market doing data deals," stated Huffman. "We're still talking to the major players."

Reddit intends to continue investing in its own AI models while also collaborating with third-party companies. Following the success of DeepSeek, a Chinese AI startup, Huffman expressed his belief that "open-source models will continue to keep pace with commercial models."

Reddit has also been developing its search capabilities. The company recently debuted an AI-powered chatbot that aims to simplify navigation for users, potentially increasing their time spent on the platform.