Reddit posted stronger-than-expected quarterly revenue, fueled by AI-powered advertising tools, but warned that erratic search referrals are slowing U.S. user growth. The company remains optimistic about future revenue while working to reduce its dependence on external search traffic.
The social media platform reported second-quarter revenue of $805 million, a 61% year-over-year increase that beat Wall Street estimates. Despite the strong financial performance and an upbeat outlook for the next quarter, Reddit shares fell about 12% in after-hours trading as investors focused on slowing domestic user growth.
Search Traffic Remains a Key Challenge
Reddit said changes in search engine algorithms have made referral traffic increasingly unpredictable, particularly in the United States. Chief Operating Officer Jen Wong described search referrals as “volatile,” noting that updates to search ranking systems continue to affect how new users discover Reddit through external search engines.
Wong told Reuters that “SEO headwinds” caused by changes in search algorithms “more than offset” the company’s efforts in terms of user acquisition in the quarter. Still, product improvements are helping convert lower-engagement visitors from search engines into loyal app users, she said.
Reddit also forecast slower revenue growth in the third quarter. However, the forecast range of $860 million to $870 million was above LSEG-compiled analysts’ average estimate of $829.1 million.
“The company’s advertiser growth in the second quarter was 70% year-over-year. So, we continue to onboard a lot more new advertisers onto Reddit,” Wong said. She added that growth was particularly strong among mid-market and small- and medium-sized businesses and international advertisers.
Executives said Reddit is working to convert more casual search visitors into logged-in app users through product improvements and better user experiences, reducing its dependence on external search traffic over time.
AI Advertising Tools Continue to Deliver Results
While search referrals remain inconsistent, Reddit’s investment in artificial intelligence is paying off in its advertising business. The company has expanded AI-powered tools that help brands create campaigns, generate ad copy, and target audiences based on conversations within subreddit communities.
“Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter, but the bigger picture is unchanged: the commercial business is strong,” Co-founder and CEO Steve Huffman said in a letter to shareholders. Huffman noted that AI overviews have yet to make a similar level of positive impact as traditional “10 blue links” on the company’s post-earnings call.
These features have attracted a growing number of advertisers, particularly small and medium-sized businesses as well as international brands. The platform’s advertising business remained the primary growth engine during the quarter, helping Reddit outperform revenue expectations.
For the third quarter, Reddit expects revenue between $860 million and $870 million, well above market forecasts, while adjusted EBITDA is projected to reach $385 million to $395 million. The strong guidance suggests the company remains confident about advertising demand despite broader macroeconomic uncertainty.
Balancing Growth in the AI Search Era
With the increase in adoption of AI-assisted search tools like Google’s AI summary service, the issue of whether users will keep clicking through to source websites is becoming a challenge that publishers like Reddit are dealing with.
Despite the advantages of licensing information to AI firms and expanding globally, experts have reservations about Reddit’s ability to maintain user acquisition with an unpredictable pattern of search referrals. Reddit is convinced that it is hard to completely replace its community discussions and genuine user-generated content with AI summaries.
In the future, Reddit’s plan is to concentrate on user engagement, expand its advertiser base, and improve products while dealing with the challenges posed by an AI-assisted internet environment.