AI Concerns Hit Reddit Stock
Reddit Shares Decline as Investors Focus on Absence of Major AI Licensing Deals
Anonymous
Key Points
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Investors punished Reddit for not announcing a major AI licensing deal in the latest quarter, despite revenue and earnings beating expectations.
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Reddit previously earned about $60 million per year from a licensing deal with Google to train AI models, and investors are watching such data partnerships as a catalyst for monetization.
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AI-powered search summaries are reducing traffic to Reddit, with reports that Google-derived AI Overviews have cut visits to other publishers, highlighting a potential headwind for licensing-based traffic.
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US users generate far more revenue per user than international users, underscoring the importance of US growth for Reddit’s monetization (approximately $11.85 per US user vs $2.26 internationally).
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For the third quarter, Reddit projected revenue of about $860 million to $870 million and adjusted EBITDA of roughly $385 million to $395 million, signaling continued momentum despite AI headwinds.
Reddit's stock cratered as much as 23% on July 31, 2026, wiping out billions in market value — even after the company reported Q2 revenue of $805 million, a 61% year-over-year jump that easily beat Wall Street's $730 million estimate. Yahoo Finance reported the sell-off was the largest single-day drop since Reddit went public.
Investors weren't punishing Reddit for a bad quarter. They were punishing it for not announcing a new AI data-licensing deal. IBTimes reported the absence of any fresh AI partnership was the primary trigger for the plunge, as traders had priced in a major announcement.
AI Search Summaries Are Eating Reddit's Traffic
Reddit's core problem is what analysts call the "AI Traffic Paradox." Google pays Reddit roughly $60 million per year to use its data to train AI models. But Google's AI Overviews — summaries that answer questions directly on the search results page — are cutting the number of users who actually click through to Reddit. CEO Steve Huffman said on the earnings call that search referrals had been "choppy" and that Google's AI summaries had "yet to make a similar level of positive impact" compared to traditional search links.
The result is a geographic mismatch that alarms investors. U.S. daily active users slipped from 53.5 million in Q1 to 53.2 million in Q2 — a small drop, but a painful one. Barchart noted that U.S. users generate $11.85 in revenue per person, versus just $2.26 for international users. That makes each lost American user more than five times as costly as a lost user abroad.
Strong Numbers Could Not Silence the AI Deal Anxiety
By almost every financial measure, Reddit had a great quarter. Ad revenue hit $762 million, up 64% year over year. Net income jumped more than five-fold to $253 million. Diluted earnings per share came in at $1.25, well above the $0.95 Wall Street consensus. Free cash flow more than doubled to $261 million. Analyst Rich Greenfield of LightShed Partners said he had "rarely" seen "a disconnect this wide between a company's revenues, earnings and free cash flow growth and short-term stock price performance."
Reddit also issued strong Q3 guidance. The company projected revenue of $860 million to $870 million — beating analyst expectations of $828 million — and adjusted EBITDA of $385 million to $395 million. Yahoo Finance reported that shares still closed down roughly 21% at around $141, as the market focused on what Reddit did not say rather than what it did.
Reddit Wins in Court While Losing on Wall Street
On the same day its stock was cratering, Reddit scored a major legal win. A federal judge in New York's Southern District ruled that Reddit's lawsuit against AI search engine Perplexity and data scraper SerpApi can move forward. Judge Paul Engelmayer sustained Reddit's key claims under the Digital Millennium Copyright Act, ruling that bypassing Reddit's technical access controls to harvest data is likely illegal. The ruling means AI companies can no longer use scraping middlemen to grab Reddit's content without risking serious legal liability.
SerpApi had argued that publicly accessible web data should be free to scrape. The court disagreed. The decision is being watched closely across the media industry, because it could force AI developers to pay for data they previously took for free — potentially driving up the cost of training large language models and pushing more companies toward formal licensing deals like the one Reddit already has with Google and OpenAI.
Bears Cut Targets While Bulls Call the Drop Overdone
Wells Fargo lowered its price target on Reddit from $187 to $142, keeping an "Equal Weight" rating. The bank warned that Reddit's relationship with Google had become a "bigger overhang" and that ongoing search traffic volatility could block a near-term recovery in U.S. user growth. JPMorgan echoed those concerns, saying Google's AI Overviews will keep pressing down on Reddit's daily active user trends.
Bulls pushed back hard. Writers at Seeking Alpha called the 21% sell-off a "dramatic" overreaction and a "false narrative," arguing that Reddit's archive of real human conversation is an irreplaceable asset for training future AI models. COO Jennifer Wong added that active advertisers grew 70% year over year, powered by Reddit's new AI-driven ad tools — a sign the core business is healthier than the stock price suggests.
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