Reddit shares plunge 23% on DAUs deceleration, weak guidance

Investing.com -- Reddit ( RDDT ) reported third-quarter results that topped analyst estimates, but shares sank sharply after the social media company issued a weaker-than-expected revenue outlook and warned of accelerating declines in search referral traffic.

The stock was down about 23% in premarket trading Friday by 04:39 ET (08:39 GMT).

Reddit reported adjusted earnings of $1.40 per share, beating the consensus estimate of $1.33. Revenue rose 53% year over year to $895 million, above expectations of $874.9 million.

However, the company forecast fourth-quarter revenue of $1.00 billion to $1.03 billion, putting the midpoint of $1.015 billion below Wall Street's $1.05 billion estimate.

The outlook comes as Reddit faces mounting pressure from changes in how users discover content online. Search referral traffic declined meaningfully in the third quarter, with the downturn accelerating toward the end of the period, CEO Steve Huffman said in a shareholder letter.

In October, search traffic fell by more than 1 million referrals per week on average. If the trend continues, Reddit warned that daily active unique users (DAUs) could decline by a low-double-digit percentage in the fourth quarter from its current base of 130.3 million.

Reddit's DAUs grew 12% in the third quarter, a 6 percentage point slowdown from the previous quarter. The shortfall came mainly from U.S. logged-out users as Google's AI Overviews cut referral traffic from one of Reddit's largest user acquisition channels.

"RDDT's delivery of strong Revenue/EBITDA growth (53%/70%) was overshadowed by worsening U.S. DAU declines, as increased prevalence of AI Overview negatively impacted referral traffic," Jefferies analyst John Colantuoni said.

"Growth is also expected to slow in 4Q, which is likely to raise concern about sustainability. We think the stock could be rangebound near-term until a recovery in user trends emerges, but still like the long-term story as monetization upside helps drive peer-leading revenue growth," he added.

Weekly active uniques grew 16% to 515.2 million.

KeyBanc Capital Markets downgraded Reddit after the earnings release. "We are downgrading shares of RDDT from OW to SW as our thesis is not playing out; search traffic is a larger headwind than envisioned (potential for a LDD% q/q decline in 4Q), and this creates more uncertainty around '27E/'28E revenue and EBITDA," they wrote.