Reddit shares fell 13% in premarket trading on Thursday after the company reported a shortfall in daily active unique visitors, attributed to a change in Google’s search algorithm that affected the visibility of the platform in search results.
Reddit’s shares drop 13% after user growth misses estimates
The adjustment in Google’s algorithm contributed to user growth challenges that Morgan Stanley analysts believe may continue to pressure Reddit’s stock in the near term. Daily active unique visitors rose 39% to 101.7 million in the fourth quarter but missed the analysts’ average estimate of 103.3 million, according to data compiled by LSEG. The growth rate has also slowed sequentially.
Reddit’s CEO Steve Huffman noted in a letter to shareholders that the search-related traffic has since recovered in the first quarter following the volatility seen in the fourth quarter due to the algorithm change. “What happened wasn’t unusual — referrals from search fluctuate from time to time, and they primarily affect logged-out users,” Huffman wrote. Analysts from Piper Sandler characterized the situation as an aberration.
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Despite the decline in user numbers, Reddit’s fourth-quarter revenue surpassed estimates, rising 71% from $250 million a year earlier to $427.7 million, primarily due to heightened advertising spending during the holiday season. The company’s profit increased to $71 million, or 36 cents per share, from $18.5 million the previous year. Adjusted earnings reached $154 million, exceeding analysts’ expectations of $128 million.
Looking forward, Reddit forecasts first-quarter sales to be between $360 million and $370 million, ahead of the average analyst estimate of $358 million. The company’s global logged-in daily active unique visitors grew 27% year over year to 46.1 million, while logged-out visitors increased by 51% to 55.6 million.
Analysts have responded to the earnings results with mixed views; at least six brokerages raised their price targets for Reddit’s stock following the results, while one set a lower target. Reddit currently holds a forward price-to-earnings ratio of 242.7, in contrast to Snap’s 28.8 and Pinterest’s 20.7. Observers note that continued international expansion and advancements in AI could bolster Reddit’s standing in the digital advertising space.
The fluctuations in user growth linked to Google’s algorithm changes are not new, as Huffman explained that such adjustments occur approximately twice a year, affecting primarily logged-out users in the U.S. He indicated that the recent downturn was followed by a rapid recovery just before the end of the quarter.
Other companies like Amazon, Alphabet, and Meta have also reported significant earnings growth in their most recent quarters, reflecting a robust online advertising market.
As of Wednesday’s close, Reddit’s stock, which went public in March at $34 a share, had surged more than sixfold to $216.47, marking a 32% increase this year before the recent selloff.
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