Reddit Shares Fall After Lower-Than-Expected User Growth in Final Quarter
Reddit’s shares took a hit in after-hours trading on Wednesday, dropping 19%, despite reporting a strong fourth-quarter earnings report. The decline was largely driven by weaker-than-expected user growth, even as the company exceeded revenue and profit expectations.
The social media platform reported a 71% year-over-year revenue increase, reaching $427.7 million, surpassing analyst expectations of $405 million. Net income soared to $71 million, more than tripling from the previous year’s $18.5 million. However, daily active users only reached 101.7 million—up from 97.2 million in the previous quarter—but still below the projected 103.1 million.
CEO Steve Huffman attributed the slowdown in user growth to a Google Search algorithm update that caused temporary traffic volatility. In a letter to shareholders, he explained, “What happened wasn’t unusual—referrals from search fluctuate from time to time, and they primarily affect logged-out users.” He added that traffic from search had recovered in the first quarter.
Reddit’s shares have performed well since its Initial Public Offering (IPO) last year, which was priced at $34 a share, jumping over sixfold to $216.47 before the after-hours decline. Despite the selloff, analysts remain optimistic about the company’s growth potential, due to their strong ad sales and AI-powered initiatives. Advertising revenue rose 60% year-over-year, with international ad sales growing by 76%, the highest in two years.
The company has also been working to convert more of its logged-out users into active, logged-in accounts, which are more valuable for ad targeting. Logged-in daily active users increased 27% to 46.1 million, while logged-out users grew 51% to 55.6 million.
Another key revenue driver for Reddit is its AI partnerships. The company secured a $60 million annual deal with Google and a content licensing agreement with OpenAI, which contributed to its “other revenue” category rising more than sixfold to $33.2 million.Reddit is also expanding its AI-powered features, such as Reddit Answers, which summarizes posts and helps users find information more efficiently. Analysts see this as a potential boost for ad revenue, as it can capture more search-driven traffic.
Looking ahead, Reddit’s guidance for the first quarter was higher than expected, with projected revenue between $360 million and $370 million, exceeding analyst forecasts of $358 million. Adjusted earnings are expected to land between $80 million and $90 million, also above estimates.
Despite the after-hours stock dip, some analysts believe the market overreacted to the user growth miss. “The stock is down for the wrong reasons,” said Trip Chowdhry of Global Equities Research, pointing to Reddit’s AI deals and strong financial performance.
While investors reacted negatively to the reduced user growth, Reddit’s strong revenue, profitability, and AI-driven initiatives indicate that the platform remains on a promising trajectory.
