Reddit Stock Plunges as Google's AI Search Erodes Traffic Revenue

Community platform Reddit has seen its shares plummet by over 29% on the New York Stock Exchange after reporting third-quarter revenue of $895 million, a 53% increase from last year. The earnings surprise beat market consensus compiled by the London Stock Exchange Group (LSEG), which had estimated $875 million in revenue.

However, Reddit’s CEO Steve Huffman attributed the decline in stock value to comments he made during an earnings presentation about referral traffic from search engines. He stated that Google’s AI Mode has led to a significant drop in visits to Reddit, with over 1 million fewer referrals per week on average during October.

Huffman also signaled that Reddit will abandon its long-standing strategy of fully opening posts to non-members in order to attract new users through top rankings in Google search. Instead, the company plans to limit access to certain parts of the platform without logging in.

The issue is not unique to Reddit and has far-reaching implications for online businesses. The spread of AI search is reducing direct visits to websites that come through search engines, undermining the foundation of website business models that rely on free content being surfaced at the top of search results to attract traffic and advertising revenue.

According to an analysis by global data analytics firm Similarweb, ‘zero-click searches’ – those ending without a single click on an external site – accounted for 68% of all Google searches as of June. This trend is eroding the traditional model of online content creation and distribution.

The impact can be seen in various sectors, with major news outlets experiencing significant declines in traffic referrals from Google organic search. The Wall Street Journal reported a 18% drop over the year through June, while Reuters saw a 35% decline and The Washington Post experienced as much as a 44% decrease.

Social media platforms that require logins are seen as relatively insulated from this trend. They do not depend on Google search referrals and can run targeted ads using user-provided information such as age, gender, and region. Meta’s third-quarter advertising revenue rose by 26% to $63.06 billion, a testament to the resilience of its business model.

However, pushback against AI-powered search is growing among website operators. PMC, publisher of Rolling Stone magazine, filed a lawsuit in September last year alleging that Google’s AI Overviews violated antitrust law and abused its search market dominance. The U.S. District Court for the District of Columbia dismissed the case in September.

USA Today has also expressed concerns about the decline in search referrals and is considering blocking Google’s crawler from collecting data on its site if the trend continues. Politico, a political news outlet, was reported to be exploring forcing logins to block AI bots.

A group of major tech companies, including OpenAI, Google, Microsoft, and Anthropic, have agreed to support the development of a technical standard that would allow website operators to refuse data collection for AI model training. This approach involves checking an operator’s refusal in their ‘robots.txt’ file and not using that data for training.

Meanwhile, companies like OpenAI are facing pressure at the fundraising stage due to concerns about the efficiency created by AI. The company recently cut its fundraising target from $30 billion to $20 billion and lowered its valuation by $150 billion.

The issue of credit assessments in capital markets is also being reshaped by these developments. Major rating agencies have not yet issued an official credit rating for Anthropic, which plans to invest over $800 billion in AI computing infrastructure through 2045. Without such a rating, institutional investors face restrictions on buying its bonds and borrowing rates rise.

Big Tech companies like Meta are also feeling the heat as they directly carry out large-scale infrastructure investment. S&P Global Ratings lowered Meta’s credit outlook from ‘stable’ to ‘negative’, citing a surge in AI capital spending and deteriorating free cash flow (FCF).

The company plans to invest $135 billion to $145 billion in AI infrastructure this year, but its third-quarter FCF swung to a deficit of $2.12 billion. S&P projected Meta’s FCF deficit would reach $71 billion in 2027 and $39 billion in 2028.

Meta spokesperson Kamran Mumtaz countered that the company respectfully disagrees with S&P’s claims about its AI monetization capabilities, citing substantial product and business opportunities ahead that support a solid credit profile. The company is also pursuing its largest-ever stock offering of $95 billion to raise funds.

The shift in market capitalization has seen Apple overtake Nvidia as the world’s largest capitalized company after three months. Analysts attribute this change not to AI advancements but rather to Apple’s strategy of being passive on large-scale AI infrastructure investment, which drew investor attention.