Reddit earnings: why are investors concerned despite solid headline numbers

Reddit RDDT stock is under immense pressure this morning, even though the forum social media platform reported an impressive Q2 and offered upbeat future guidance.

Investors are bailing on RDDT not because of the quarterly print itself, but more due to concerns about the company’s long-term traffic growth.

Following today’s decline, Reddit shares are down more than 40% versus the start of this year.

Why is Reddit stock tumbling on Friday?

Reddit’s second-quarter financials were excellent; sales went up 61% year-on-year to $805 million on $1.25 a share of earnings (EPS) – both ahead of Street estimates.

Advertising revenue soared 64% in Q2, bringing management sufficient confidence to offer better-than-expected guidance as well.

Still, RDDT shares are experiencing a sell-off mostly because investors are worried about Google’s artificial intelligence (AI) search changes.

In the earnings release, management acknowledged that Alphabet Inc search referrals have become “choppy” or volatile.

Since RDDT has historically relied on Google Search to bring new visitors to the platform, market fears that the titan’s AI-generated answers could reduce traffic over time.

It’s actually why reports emerged last week that Reddit wants to renegotiate the terms of its deal with Google or walk away from it entirely.

What else is hurting RDDT shares today?

Reddit shares are slipping also because US user growth disappointed in its fiscal Q2.

While global daily active users (DAUs) increased to 130.3 million, US growth stood at about 6%.

International markets drove most of Reddit's user growth in the second quarter, accounting for 85% of net new users.

That shift is significant because Reddit generates substantially more revenue from users in the United States.

The company reported average revenue per user of about $11.85 in the US, compared with just $2.26 for international users, highlighting the gap in monetisation outside its home market.

Investors should also note that algorithmic selling is in play on Friday as well. Reddit Inc crashed through its 50-day and 100-day moving averages (MAs) today, which tends to accelerate bearish momentum in the near-term.

How to play Reddit after Q2 earnings?

Investors are recommended to exercise caution in buying RDDT stock on the post-earnings dip because AI is creating an existential question for the social media firm.

Analysts increasingly worry that AI assistants can summarize Reddit discussions without users ever visiting the platform itself.

Even though Reddit licenses data to companies like OpenAI and Alphabet, investors wanted more evidence that these licensing deals can offset any decline in search-driven traffic.

But there were no major new updates on those agreements on the earnings call, which is why they are unloading RDDT despite an otherwise strong quarterly print today.

That said, Wall Street was largely bullish on Reddit heading into the earnings report.

The consensus rating on the NYSE-listed firm stood at Moderate Buy, with the mean price target of $224 signalling massive upside potential from here.