Reddit Stock Collapses 23% as AI Eats Away at User Growth

The artificial intelligence boom has rewarded companies that own valuable data, but it is also rewriting the ways in which people discover information online. AI-powered search summaries (or AIO - Artificial Intelligence Overview) are increasingly answering questions before users ever visit the websites that created the content.

That has become a growing challenge for publishers, forums, and social media platforms that depend on traffic to build loyal audiences and sell advertising. Reddit (RDDT) was one of the biggest winners after licensing its massive archive of discussions to Alphabet's (GOOG) (GOOGL) Google. Its second-quarter earnings suggest the relationship may be more complicated than investors first believed.

The market's reaction said as much. Despite reporting revenue and earnings that exceeded Wall Street expectations and issuing third-quarter guidance roughly in line with consensus estimates, Reddit shares plunged 23% following its earnings release.

The Revenue Beat Hid A Slowing Core Business

Reddit's Q2 revenue climbed 72% year-over-year (YOY) to $500 million while adjusted EBITDA reached $167 million, up from $39 million a year ago. Those are outstanding financial results on the surface.

Yet user growth tells a different story. Global daily active unique users (DAUq) increased 18% YOY, a modest improvement from 17% growth in the first quarter. The problem is where that growth is coming from.

The slowdown among U.S. users is particularly concerning because they generate far more revenue. Reddit reported average revenue per U.S. user of $11.85, compared with just $2.26 internationally. That means each slowing U.S. user matters roughly five times as much to the business as an international visitor.

Surprisingly, the weakest number may be logged-in users. Growth held at just 1% for the second straight quarter, down from 12% one year ago.

AI May Be Keeping Users Off Reddit

On paper, logged-out users look like a bright spot after growing 27%. In reality, they're much less valuable. Logged-in users create posts, comment, subscribe to communities, and develop habits that advertisers value. Logged-out visitors often arrive through search, consume a single page, and leave.

That distinction matters because Reddit appears ready to stop highlighting it. Management disclosed it plans to phase out reporting logged-in and logged-out user figures in future quarterly reports, reducing investors' visibility into one of the platform's most important engagement metrics.

Ironically, Reddit may be experiencing the unintended consequences of one of its biggest AI partnerships.

Google licensed Reddit's content to improve AI-generated search summaries. Those summaries frequently answer users' questions by drawing from Reddit discussions without requiring users to click through to Reddit itself. The arrangement generates licensing revenue, but it may also reduce opportunities to convert casual visitors into engaged, logged-in users who ultimately become more valuable advertising customers.

That's a difficult tradeoff for a platform whose long-term value depends on building an active community rather than simply supplying data to someone else's AI. Reddit is rethinking its Google partnership.

Key Takeaway

Reddit's advertising business remains healthy. Revenue from advertisers continued expanding, driven largely by small and medium-sized businesses, according to management. That diversification is encouraging, although several Wall Street analysts have previously noted that smaller advertisers can be more sensitive to economic slowdowns than large global brands.

In short, Reddit's financial results still look strong today. But investing is about where a business is heading, not where it has been.

The numbers beneath the surface point to slowing growth among Reddit's most valuable users, rising dependence on lower-value logged-out traffic, and less transparency around the very metrics investors need to evaluate the trend. If AI-powered search continues answering questions before users ever reach Reddit, the company may find that monetizing its data becomes easier while growing its community becomes much harder.

For long-term investors, that's the risk worth watching. It's not about whether Reddit beat earnings estimates by a few million dollars, but whether AI is quietly eroding the engagement that made the platform valuable in the first place.