Q4 performance exceeded expectations but concerns over slowing user growth led to a shocking post-market plunge for Reddit

According to Zhitong Finance APP, Reddit (RDDT.US) plummeted in late trading on Wednesday, primarily due to the company's fourth-quarter user growth falling short of Wall Street expectations, highlighting that this newly listed company is lagging behind larger digital advertising peers Meta Platforms (META.US) and Google (GOOGL.US). The company's fourth-quarter financial report released after the market closed on Wednesday showed that the average daily active unique visitors during this period was 101.7 million, below the analysts' average expectation of 103.8 million.

The report indicated that the company's Q4 sales increased by 71.3% year-on-year to $427.7 million, exceeding the market's general expectation of $408.9 million, with a GAAP earnings per share of $0.36, surpassing the analysts' average expectation of $0.25. Additionally, the revenue guidance for the next quarter was better than expected, with the company forecasting quarterly revenue of $360 million to $370 million, with a median of $365 million, exceeding the analysts' average expectation of $360.3 million. However, the unfavorable situation regarding user growth metrics still raised concerns in the market.

Reddit stated that user growth slowed after Google changed its algorithm, affecting search traffic. In recent years, Google's parent company Alphabet accounted for as much as 50% of Reddit's traffic in a single day, making the social media site highly susceptible to the influence of the top-ranked search engine.

Reddit CEO Steve Huffman said in an interview, "Google's algorithm has changed." He pointed out that this impact is mainly reflected in U.S. users who are not logged into the Reddit platform. He mentioned that the company has already seen improvements in the first quarter.

After the report was released, the company's stock fell nearly 20% in after-hours trading, and as of the time of writing, the stock was down 15% in after-hours. Since its listing in March last year, Reddit's stock price has increased more than sixfold, rising over 30% this year, far exceeding the broader market. It has been one of the best-performing newly listed stocks since the slowdown of the U.S. IPO market in 2022.

Bloomberg Intelligence analyst Mandeep Singh stated that the lack of quarterly growth in daily users in the U.S. may be due to "large language model applications and search providers displaying summarized results on their own pages instead of directing traffic to Reddit." Singh pointed out Reddit's reliance on Google for traffic and mentioned that Reddit may increase AI features "to reduce dependence on large language models and search engine usage."

Headquartered in San Francisco, Reddit has been heavily investing in advertising technology to better compete with Google and Meta, which dominate the global advertising market. Over the past year, Reddit has launched several new advertising formats, including shopping ads and video ads, and has signed content partnerships with major sports leagues, which may in turn increase its appeal to advertisers. In addition to international marketers, this social media site is also focused on attracting more small and medium-sized advertisers Reddit has also been reaching agreements with artificial intelligence companies to diversify its business beyond advertising. Last year, Reddit signed a $203 million data licensing agreement with partners such as Google and OpenAI. Wall Street expects more deals in the future as companies operating large language models seek to train their models on large data repositories.

"We are still doing data deals in the market," Hoffman said. "We are still negotiating with major players."

In addition to collaborating with third-party companies, Reddit also plans to continue investing in its own artificial intelligence models. After the Chinese AI startup DeepSeek shocked the global market with its high-quality, low-cost open-source model, Hoffman stated that he expects "the open-source model to continue to align with business models."

Reddit has also been investing in its own search capabilities. The company recently launched an AI chatbot designed to help users navigate its forums more easily, encouraging them to spend more time on the site