Reddit's stock experienced a notable decline over the past week, driven by a decrease in traffic from Google and increasing investor scrutiny on the company's user segmentation data. The shares closed at $168.73 on Friday, reflecting a 7.1% drop over five trading sessions, and are down 26.6% for the year.
The decline accelerated on July 22, when the stock fell 8.32% from $185.84 to $170.38, wiping out approximately $3.0 billion in market capitalization. This figure is roughly 50 times the annual fee that Google pays Reddit under their current agreement, which is valued at about $60 million per year.
The dispute between Reddit and Alphabet's Google (NASDAQ: GOOGL) extends beyond licensing revenue. Investors are concerned about potential declines in referral traffic from Google Search, which could impact Reddit's user base and advertising revenue. The Wall Street Journal reported that Reddit had considered limiting Google's access to its content for AI training purposes, as the two companies negotiate a renewal of their 2024 agreement.
The quarterly payment from Google amounts to $15 million, representing just 2.1% of Reddit's projected $720 million second-quarter revenue at the midpoint. However, the market's reaction suggests that investor concerns go far beyond the direct financial impact of the deal.
Reddit's audience composition is at the heart of the issue. In the first quarter, logged-out daily active uniques (DAUq) totaled 74.8 million, making up 59% of Reddit's total 126.8 million daily active users. The company has noted that most visitors from search engines are not logged into the platform and that logged-out users tend to engage less and generate lower revenue per user.
The gap between logged-in and logged-out users widened in Q1, with logged-out DAUq increasing 26% year-over-year compared to a 7% increase for logged-in users. Reddit attributed part of this growth to search algorithm changes, which now puts additional pressure on the upcoming Q2 report scheduled for Thursday after the market close.
Starting in Q3, Reddit will no longer disclose logged-in and logged-out DAUq, making the Q2 report the last unaffected reading. This change has heightened focus on the upcoming metrics. Analysts are divided on the implications: RBC Capital Markets' Brad Erickson described the development as a 'significant step backwards,' while D.A. Davidson's Wyatt Swanson noted that both parties continue to benefit from maintaining referral traffic.
Reddit's valuation leaves limited room for error. The stock trades at a trailing P/E of 47.8x, compared to Pinterest's 45.9x and Meta Platforms' 21.6x. While Reddit's Q1 revenue surged 69% to $663 million, with advertising revenue up 74% to $625 million, the company's premium valuation makes it vulnerable to any negative surprises in user metrics.
CEO Steve Huffman has stated that Reddit holds a 'unique advantage in the age of AI,' but investors will be evaluating this claim against the logged-out user data and any commentary from Google. Key risks include a failure to renew the Google deal, which could cut off licensing revenue and reduce referral traffic, as well as shifts in ad demand and algorithmic changes.
