Reddit (NYSE:RDDT) shares experienced a sharp decline in premarket trading on Wednesday, falling 6.1% to $174.52, as a report surfaced indicating the company is considering restricting Google's access to its content for artificial intelligence purposes. The drop erased approximately $2.2 billion from the company's market capitalization compared to Tuesday's close, with regular trading on the NYSE set to begin at 9:30 a.m. EDT.
The Wall Street Journal reported that Reddit has been in discussions about limiting Google's ability to use its content for AI training. Google is a subsidiary of Alphabet (NASDAQ:GOOGL). The report noted that the talks are ongoing and no final decision has been made, but the news has nevertheless rattled investors.
The core concern for shareholders centers on Reddit's reliance on search traffic to expand its advertising audience. In the first quarter of 2026, Reddit's advertising revenue totaled $624.7 million, representing 94.2% of total revenue. The remaining 5.8% came from other revenue, which includes content licensing and direct-user products. The company reported that logged-out daily active uniques, which are largely driven by search traffic, accounted for 74.8 million users, or 59.0% of total daily active users. These users are less monetizable than logged-in users, but they still contribute significantly to advertising inventory.
Content licensing, while a smaller revenue stream, is heavily concentrated. As of March 31, Reddit had $120.6 million in remaining performance obligations, the majority stemming from long-term content licensing agreements. The company expects to recognize $91.6 million of that amount over the remainder of 2026. However, Reddit has cautioned that nearly all licensing contract value comes from just two partners, creating a concentration risk that could lead to reduced pricing or diminished service offerings upon renewal.
The Journal's report focused specifically on AI access and did not mention any changes to traditional search indexing. A broader disruption in search traffic could have a more significant impact on Reddit's advertising inventory and revenue. The company's first-quarter advertising revenue grew 69% year-over-year to $663.4 million, with adjusted EBITDA of $266.0 million, or 40.1% of revenue. Chief Operating Officer Jen Wong told Reuters in April that the active advertiser count grew 75% year-over-year, with performance advertising accounting for over 60% of advertising revenue.
Reddit's stock had already fallen 7.2% in the previous week ending Friday, before rebounding 2.6% through Tuesday. Wednesday's premarket decline threatens to erase those gains. Broader market pressure also contributed to the cautious sentiment, with Nasdaq 100 futures falling 0.6% earlier in the day. Alphabet is scheduled to report its quarterly earnings after Wednesday's market close, which could provide further context on the AI licensing landscape.
Reddit is set to report its own quarterly results after the close on Thursday, July 30. The company's revenue outlook is between $715 million and $725 million, while preliminary consensus from Google Finance stands at $731.0 million, slightly above the top end of Reddit's guidance. The upcoming earnings will be a critical test for the company, as investors will be looking for evidence that advertising gains can offset any potential disruptions from changes in search traffic or AI licensing.
