Reddit Shares Drop by More Than 15% Amid User Growth Concerns Despite Strong Earnings – The Impact of Google Algorithm Changes

Reddit shares fell more than 15% on Wednesday following the company’s release of its fourth-quarter earnings, which revealed weaker-than-expected user numbers despite exceeding revenue and profit estimates.

Earnings Performance vs. Estimates

Reddit’s results compared with LSEG estimates were as follows:

• Earnings per share: $0.36 (exceeding the expected $0.25)
• Revenue: $428 million (surpassing the anticipated $405 million)

While global daily active uniques (DAUq) increased 39% year over year to 101.7 million, the figure fell short of Wall Street’s expectation of 103.1 million.

Impact of Google Algorithm Changes

According to Reddit CEO Steve Huffman, a modification to Google’s search algorithm led to volatility in user growth during the fourth quarter. However, he noted in a letter to shareholders that search-related traffic had recovered in the first quarter. He explained that fluctuations in referrals from search engines were not unusual, primarily affecting logged-out users. Huffman credited Reddit’s teams for effectively adapting to these algorithm changes.

Over the past 18 months, the platform has benefited from Google search updates and internal site improvements, which contributed to an influx of new and returning logged-out users. Reddit has indicated that it is actively working to convert these logged-out users into logged-in accounts, which are more valuable to its business.

In the fourth quarter:

• Logged-in DAUq rose 27% year over year to 46.1 million
• Logged-out DAUq increased 51% year over year to 55.6 million

During the earnings call, Huffman stated that Google’s algorithm changes occur about twice a year, adding that such fluctuations were neither the first nor the last. He described the latest shift as particularly notable, as there was an initial decline followed by a rapid recovery toward the end of the quarter.

Revenue Surge and Future Outlook

Despite missing user growth expectations, Reddit reported strong financial performance and provided an optimistic outlook.

• Revenue grew 71% year over year, reaching $428 million, marking the platform’s fastest growth rate in any quarter since 2022.
• The company projected first-quarter sales between $360 million and $370 million, surpassing the average analyst estimate of $358 million.
• Net income nearly quadrupled to $71 million ($0.36 per share) from $18.5 million (breakeven per share) a year earlier.
• Adjusted earnings reached $154 million, beating analyst expectations of $128 million.

Stock Performance and Market Trends

Since its March IPO at $34 per share, Reddit’s stock had skyrocketed more than sixfold, closing at $216.47 on Wednesday. Prior to the after-hours decline, shares had already gained 32% this year.

Reddit’s earnings report followed similar quarterly releases from major online advertising firms:

• Amazon reported a $17.29 billion revenue in its advertising sector, an 18% year-over-year increase.
• Pinterest disclosed a sales rise of 18% to $1.15 billion.
• Alphabet (Google’s parent company) saw 11% growth in Google’s ad revenue, reaching $72.46 billion, while YouTube’s ad sales climbed 14% to $10.47 billion.
• Snap posted 14% revenue growth, bringing in $1.56 billion.
• Meta recorded a 21% increase in fourth-quarter revenue to $48.39 billion.
• Microsoft reported a 21% rise in news advertising sales, though it did not disclose specific quarterly figures.

Despite the short-term drop in share price, Reddit remains optimistic about its growth trajectory, backed by strong revenue performance, expanding ad sales, and an ongoing push to convert logged-out users into registered members.

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