(Bloomberg) -- Reddit Inc. shares slumped after fourth-quarter user growth missed Wall Street’s expectations, a sign the newly public company is struggling to keep up with larger digital advertising peers Meta Platforms Inc. and Google.
The company averaged 101.7 million daily active unique visitors in the period, according to a statement Wednesday. That fell short of analysts’ average projection of 103.8 million.
Reddit said user growth slowed after Google made a change to its algorithm that impacted search traffic. Over the past few years, Alphabet Inc.’s Google has accounted for as much as 50% of Reddit’s traffic in a single day, making the social media site susceptible to changes made by the No. 1 search engine.
“Google algorithm changes — they happen,” Reddit Chief Executive Officer Steve Huffman said in an interview, noting that the impact was predominately seen in the US among users who weren’t logged into Reddit’s platform. He said the company has already seen improvements in the first quarter.
The company’s shares slid as much as 9.2% after markets opened in New York on Thursday. Before the results were announced, Reddit’s stock had increased more than sixfold since it went public last March, and had jumped more than 30% this year, significantly outpacing the broader market. It’s been one of the best performing stocks to go public since the market for IPOs began to slow in 2022.
Mandeep Singh, an analyst at Bloomberg Intelligence, said the lack of growth from quarter to quarter among US daily users may be a result of “large language model apps and search providers showing summarized results on their own pages rather than directing traffic to Reddit.” Singh pointed to Reddit’s reliance on Google for traffic, and said that Reddit is likely to add AI capabilities “to reduce dependence on LLM and search engine use.”
Sales in the holiday quarter, meantime, increased 71% to $427.7 million for the period ended in December, Reddit said. That surpassed the $405 million analysts had predicted on average, according to a Bloomberg survey. Net income rose to $71 million, or 36 cents a share. The company forecast revenue of $360 million to $370 million in the current quarter, exceeding the average analyst estimate of $359 million.
San Francisco-based Reddit has been investing heavily in advertising technology to better compete with Google and Meta, the owner of Facebook and Instagram, which dominate the global ad market. Reddit launched several new ad formats over the past year, including shopping and video ads, and signed content partnerships with major sports leagues that in turn could draw advertisers. The social media site has focused on attracting more small- and medium-sized advertisers, in addition to international marketers.
Reddit has also been striking deals with artificial intelligence companies to diversify its business beyond advertising. Last year, Reddit signed data-licensing agreements worth $203 million with partners including Google and OpenAI, and Wall Street expects more deals to come as companies operating so-called large language models seek to train their models on large data repositories.
“We’re still in the market doing data deals,” Huffman said. “We’re still talking to the major players.”
Reddit plans to keep investing in its own AI models, in addition to teaming up with third-party companies. After China-based AI startup DeepSeek surprised the global markets with a high-quality, low-cost open-source model, Huffman said he expects that “open-source models will continue to keep the pace with commercial models.”
Reddit has also been investing in its own search capabilities. The company recently launched an AI-powered chatbot designed to help users more easily navigate its forums, thus encouraging them to spend more time on the site.
(Updates with share move in the fifth paragraph.)
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