Reddit Inc. shares experienced their steepest intraday decline since going public in 2024, plunging as much as 24% to $135.82 in New York on Friday. The stock has dropped 40% year-to-date. This record plunge occurred despite Reddit reporting strong second-quarter sales and issuing an optimistic revenue forecast for the current quarter, surpassing Wall Street's expectations. Investors were reportedly disappointed by the absence of new AI data licensing agreements, which they had hoped would diversify the company's revenue streams.
Reddit's second-quarter sales surged 61% year-over-year to $805 million, exceeding analyst estimates of $730.4 million. The company also projected third-quarter revenue to be between $860 million and $870 million, higher than the average analyst estimate of $829.4 million. Adjusted earnings for the third quarter are expected to be between $385 million and $395 million, also topping Wall Street projections. Despite these positive financial results, the focus on new AI deals, particularly given existing partnerships with OpenAI and Google, overshadowed the earnings.
The company's "Other revenue" category, which includes its data licensing business, grew 24% year-over-year to $43 million, with OpenAI and Google being its two largest data licensing partners. CEO Steve Huffman stated in a letter to shareholders that the company's top priority is to increase its daily active user base, which stood at 130 million, in line with analyst expectations. He also acknowledged that search referrals were "choppy" in the quarter, which contributed to investor concerns. Despite the stock drop, Reddit's free cash flow over a 12-month period reached $1 billion, providing resources for future investments and potential acquisitions.
Analysts noted that the market's reaction highlighted investor anxiety about how AI is reshaping search referral traffic and the future of data licensing. Huffman emphasized that Reddit's data is valuable beyond just raw training data and that licensing deals need to maximize value for the company, indicating a thoughtful approach to future negotiations. The plunge underscores Wall Street's sensitivity to the potential for new, significant AI-related revenue streams, even when core advertising and user growth remain robust.
