What Happened?
Shares of online community and discussion platform Reddit (NYSE: RDDT) fell 23.2% in the morning session after Reddit's strong second-quarter earnings report was overshadowed by concerns that changes to Google's AI search could threaten its user traffic and growth. Despite delivering revenue of $804.9 million, a 61.1% year-over-year increase, and stronger-than-expected profits, the company's stock fell sharply.
The main concern for investors was uncertainty around how users will find Reddit as Google increasingly uses AI-generated summaries instead of traditional search links. This change threatens Reddit's referral traffic, a key source of its audience. The issue was highlighted by slowing domestic daily active user growth of 5.8% and CEO Steve Huffman's comment that search referrals had become “choppy” during the quarter.
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What Is The Market Telling Us
Reddit’s shares are extremely volatile and have had 53 moves greater than 5% over the last year. But moves this big are rare even for Reddit and indicate this news significantly impacted the market’s perception of the business.
The previous big move we wrote about was 9 days ago when the stock dropped 5.9% on the news that reports revealed the company is reconsidering its AI data-licensing agreement with Google. The Wall Street Journal reported that Reddit executives are reevaluating their $60 million-a-year licensing deal with Google, which was signed in 2024. While the agreement allows Google to train its models on Reddit's vast library of human-generated content, the integration of Google's "AI Overviews" has complicated the relationship, as it hurts Reddit's core business by answering user queries directly on the search page, reducing click-through traffic to the platform.
As the two companies enter a standoff over contract renewals, investors grew anxious about the potential loss of this high-margin AI revenue stream.
While Reddit depends on Google for traffic, the leverage doesn't just lie with the search giant. Reddit's vast repository of human content, which boasts high trust among consumers and high commercial intent that is coveted by advertisers, is increasingly valuable for AI training in world increasingly dominated by AI-generated content (aka "slop"). Google is further incentivized to sign a deal with Reddit to keep Reddit's data out of the hands of key competitors also looking to train their AI models.
Reddit is down 42.1% since the beginning of the year, and at $139.96 per share, it is trading 48.3% below its 52-week high of $270.71 from September 2025. Investors who bought $1,000 worth of Reddit’s shares at the IPO in March 2024 would now be looking at an investment worth $2,775.
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