Reddit Q2 earnings beat estimates, but search referrals pressure shares

Reddit Q2 earnings came in well ahead of Wall Street’s expectations, yet the stock fell in after-hours trading after the company warned that search referral traffic was uneven. For everyday investors, the selloff shows that Reddit’s growth story is tied not only to ad sales, but also to how reliably users arrive from Google search.

CNBC reported that Reddit shares dropped around 7% after the results. The move came even as the company beat LSEG estimates on both revenue and profit, and gave third-quarter guidance above analyst forecasts.

Why did Reddit stock fall after earnings?

Reddit said in its investor letter that “Search referrals were choppy in the quarter,” and CEO Steve Huffman wrote that traffic became more volatile later in the period. Search referrals are visits that come from search engines, and they matter because more traffic can give Reddit more chances to show ads and grow its user base.

Investor concern centers on Reddit’s reliance on Google as a source of incoming users, according to CNBC. Earlier in July, Reddit shares fell after The Wall Street Journal reported that the company was considering cutting off Google’s access to its data, while publishers have raised concerns that Google’s Gemini-powered AI features may reduce referral traffic, CNBC reported.

A Reddit spokesperson told CNBC at the time that the company was handling negotiations “just like any business should, by focusing on doing what’s best for Reddit.” Huffman also said Reddit is still looking for a mutually beneficial outcome in AI overviews, adding that he does not see the situation as a “simple binary decision.”

What did Reddit report for the second quarter?

Reddit reported earnings of $1.25 per share, compared with the 95 cents expected by analysts surveyed by LSEG, according to CNBC. Revenue reached $805 million, above the $730 million analysts expected.

Sales rose 61% from $500 million a year earlier, Reddit said. Net income increased to $253 million, or $1.25 per share, from $89 million, or 45 cents per share, in the year-earlier period.

• Revenue: $805 million, versus $730 million expected by LSEG
• Earnings per share: $1.25, versus 95 cents expected by LSEG
• Net income: $253 million, up from $89 million a year earlier
• Free cash flow: $261 million, up from $111 million a year earlier

Reddit also projected third-quarter revenue of $860 million to $870 million, ahead of analyst expectations of $828 million, according to CNBC. The company said adjusted earnings for the quarter should land between $385 million and $395 million, compared with Wall Street projections of $368 million.

How is Reddit’s user growth holding up?

Reddit said global daily active unique users, or DAUq, rose 18% from a year earlier to 130.3 million, slightly above analyst estimates of 129.9 million cited by CNBC. DAUq counts distinct users who visit Reddit on a given day.

In the U.S., Reddit’s DAUq increased 6% to 53.2 million. Average revenue per user, known as ARPU, was $6.18 globally and $11.85 in the U.S.; ARPU measures how much revenue a company generates for each user on average.

Reddit’s “Other revenue” segment, which includes data licensing, grew 24% year over year to $43 million. CNBC reported that OpenAI and Google are Reddit’s two largest data licensing partners.

Huffman told investors that the “bigger picture is unchanged,” pointing to Reddit’s commercial business, revenue growth and product progress. The market reaction showed that investors are still watching whether search volatility becomes a drag on Reddit’s ability to turn audience growth into ad revenue.

This story draws on original reporting from CNBC.