Reddit has decided to take AI innovation more seriously in response to a tweak in Google’s algorithm that affected traffic to the site in 2024. In the fourth quarter of 2024, Reddit’s site averaged 101.7 million daily active unique users, which falls below Wall Street analysts’ estimates of 103.8 million.
User growth is a critical metric for Reddit, and analysts worry because most of its business relies on advertising. In fact, prior to the company going public in March, it stated in a filing that “substantially” all of its revenue comes from advertising.
A small tweak with a significant repercussion
Towards the end of 2024, Google made a small change to its algorithm that subsequently reduced traffic and caused Reddit’s user growth to fall below Q4 expectations. The company revealed this on Wednesday, and hours later, its stock dropped by more than 15%.
Reddit recorded $428 million in revenue for the fourth quarter, which is a positive result in a vacuum since it shows a 71% year-over-year increase from 2023.
About 92% of the fourth-quarter revenue was generated from advertising, while the rest came from Reddit’s “other revenue” segment, which includes content licensing deals. The segment comprises its conversation placement ads that allow brands to advertise directly into discussion threads within interest-based communities known as subreddits. It reportedly contributed $144.7 million in 2024.
Steve Huffman, the firm’s CEO, confirmed on an earnings call that people have become more accustomed to using search engines like Google to access the Q&A forum. So, when Google tweaked its search algorithm, it affected the traffic that would have normally been directed to the site.
Huffman is not worried about it, however, and has said that the volatility did not impact revenue.
“We feel very good about the pace that we’re on from Q1,” Huffman said, noting that the volatility is not a new experience with Google, and it affected others too.
How Reddit plans to use AI to maintain an edge
According to Huffman, during the earnings call, the algorithm change primarily impacted “logged-out users,” referring to people visiting the Q&A forum without accounts.
Meanwhile, logged-in user numbers grew by 27% in 2024. The CEO also said the number of Google search queries with the “Reddit” tag increased, which suggests that more users are gravitating towards the platform for answers.
The company has been working hard to attract and convert visitors into permanent users. It has stopped forcing searchers to download the Reddit app and has started showing all public posts, even if the searcher is logged out.
More importantly, the Huffman-led company is expanding its AI strategy to include building tools such as Reddit Answers, an AI-powered search tool that generates answers based on input from users on the platform. Hoffman believes this is the solution to gain more loyal users.
It is one of the latest AI-related moves and partnerships Reddit has made in the past year. The company also revealed a content licensing deal with Google and OpenAI, which would allow the creators of Gemini and ChatGPT to train their models with user data.
The exact amount those deals brought in for Reddit revenue-wise is currently unclear. However, Google reportedly paid $60 million per annum for its licensing deal.
While Reddit’s stock fluctuated frequently in the past year, there is little doubt the company has become more valuable. It had its IPO in March at $46 and is up 32% this year.
The stock ( RDDT ) is now priced at $216.47, with a market capitalization of $37.53 billion, reflecting a decrease of 3.35% over the last week. The company’s next earnings report will be on May 13, 2025.
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