Q4 performance exceeded expectations but worries over slowing user growth led to a sharp drop in Reddit (RDDT.US) stock after hours, surprising the market.

Reddit (RDDT.US) plunged in the final trading session on Wednesday as the company's fourth-quarter user growth fell below Wall Street's expectations, highlighting the new public company's lag behind larger digital advertising competitors Meta Platforms (META.US) and Alphabet Inc. Class C (GOOGL. US). The company's fourth-quarter financial report released after the market closed on Wednesday showed that the company had an average of 101.7 million daily active unique visitors during this period, below analysts' average expectation of 103.8 million. The report revealed that the company's Q4 revenue increased by 71.3% year-over-year to $427.7 million, exceeding the market's general expectation of $408.9 million. GAAP earnings per share were $0.36, surpassing analysts' average expectation of $0.25. In addition, the revenue guidance for the next quarter was better than expected, with the company expecting revenue of $360 million to $370 million, with a midpoint of $365 million, surpassing analysts' average expectation of $360.3 million. However, the unfavorable user growth metric still worries the market. Reddit stated that the user growth on the platform slowed down after Alphabet Inc. Class C changed its algorithm, affecting search traffic. Over the past few years, Alphabet's Alphabet Inc. Class C has accounted for more than 50% of Reddit's traffic in a day, making the social media platform highly susceptible to the influence of the top-ranked search engine. Reddit CEO Steve Huffman said in an interview, "Alphabet Inc. Class C's algorithm has changed." He pointed out that this impact is mainly reflected in American users who do not log in to the Reddit platform. He said the company has already seen improvements in the first quarter. Following the release of the report, the company's stock dropped nearly 20% in after-hours trading, and as of the time of writing, the stock was down 15% after hours. Since its listing in March last year, Reddit's stock price has more than sixfold, rising by over 30% this year, far outperforming the broader market. It has been one of the best-performing public stocks since the slowdown in the U.S. IPO market in 2022. Bloomberg Intelligence analyst Mandeep Singh said that the lack of quarterly growth in daily U.S. users may be due to "large language model applications and search providers displaying aggregated results on their pages instead of redirecting traffic to Reddit." Singh pointed out Reddit's dependence on traffic from Alphabet Inc. Class C and suggested that Reddit may increase artificial intelligence capabilities "to reduce dependence on large language models and search engines." Based in San Francisco, Reddit has been investing heavily in advertising technology to better compete with Alphabet Inc. Class C and Meta, which dominate the global advertising market. Over the past year, Reddit has launched several new ad formats, including shopping ads and video ads, and signed content partnership deals with major sports leagues, which in turn may attract more advertisers. In addition to international marketers, the social media site is also focused on attracting more small and medium-sized advertising clients. Reddit has also been partnering with artificial intelligence companies to diversify its business beyond advertising. Last year, Reddit signed a $203 million data licensing agreement with partners such as Alphabet Inc. Class C and OpenAI. Wall Street expects more transactions in the future as companies operating large language models seek to train their models on large data repositories. "We are still doing data deals in the market," Huffman said. "We are still negotiating with major players." In addition to partnering with third-party companies, Reddit plans to continue investing in its own artificial intelligence models. Following the shock of the high-quality, low-cost open-source model by Chinese artificial intelligence startup DeepSeek in the global market, Huffman expects the "open-source model to continue to be in sync with the business model." Reddit has also been investing in its own search capabilities. The company recently launched an artificial intelligence chatbot Siasun Robot & Automation, designed to help users browse its forums more easily, encouraging them to spend more time on the site.