Reddit delivered a solid second-quarter performance, but a cautious comment in a letter to investors about search engine traffic becoming "choppy" rattled the market.

The company posted total revenue of $805 million, a 61% increase from the same quarter last year, while net income soared 183% to $253 million. Both figures surpassed Wall Street's expectations. Additionally, Reddit projected next-quarter revenue between $860 million and $870 million, along with healthy pre-tax earnings, again beating forecasts. Typically, such upbeat guidance would lift a stock, but shares dropped more than 10% in after-hours trading. The likely trigger was CEO Steve Huffman's warning in the shareholder letter: "Search referrals were choppy in the quarter, and traffic was more volatile later in the quarter, but the bigger picture is unchanged: the commercial business is strong."

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Artificial intelligence is reshaping the search landscape, and investors appear worried that Reddit's traffic may suffer as a result. In 2024, Reddit signed a deal to license its content to Google for AI training. However, Google's rollout of AI-generated summaries seems to be drawing audience away from Reddit, and the company has signaled uncertainty about renewing that partnership. Another concern is whether Reddit's user growth is happening in the right areas. While global users are rising, daily active unique users in the U.S. dipped slightly—from 53.5 million in Q1 to 53.2 million in Q2.

During Thursday's earnings call, analysts pressed Huffman on AI's impact. One Wall Street analyst bluntly stated, "I don’t want to belabor this point, but your stock is down sharply because there is just a sense from investors that you have a—I don’t want to, to be blunt—a user problem, especially in the U.S." The analyst continued, "People are looking at the daily and saying, you know, the logged-out traffic is going to be under pressure because as search shifts to AI, you’re not going to get referrals, and that it’s going to be harder to get people to go from logged-out to logged-in, and that’s sort of symptomatic of what you’re seeing." The analyst then asked, "Do you see any world where you’re not licensing data to Google and OpenAI next year?"

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Huffman responded by emphasizing the enduring appeal of Reddit's human-driven communities. "Reddit is communities and conversation. Communities are universal, and so we think we have in the U.S. content for everyone, and it’s a matter of revealing that. And we’re making progress towards that end," he said. On the topic of Google, Huffman was less definitive. "Our relationship with them actually predates the formal kind of data licensing agreements," he noted. "I don’t think there’s a binary outcome… we will make sure that we’re maximizing the value for Reddit."