The Hidden Cost of Reddit's AI Pivot: Inside the 15% Stock Drop

Reddit shares fell more than 15% after the company missed its global daily active uniques target (101.7 million for the quarter versus 103. million), caused by a Google search algorithm change.

It’s unclear whether this algorithm change’s main aim was to deprioritise Reddit as they continue to look to expand AI generated answers and/or whether this had anything to do with Reddit’s recently launched Reddit Answers, their own version of an AI search engine.

Historically, the company has been one of the laughing stocks of the tech industry, along with Twitter, for a lack of new features, famously bad search, and very few UI updates.

Reddit answers, however, has been one of a few early, but promising, signs of innovation at Reddit as a public company.

Reddit’s New Growth Playbook

The next step is to test the waters and see if they can launch and successfully monetize a consumer subscription business, by introducing the ability to paywall subreddits. The feature, coming later this year according to Reddit CEO Steve Huffman would introduce a new type of subreddit with "exclusive content or private areas" that Reddit users would pay to access.

Reddit has had paid-for premium versions of community features before, like r/Lounge, a subreddit that only people with Reddit Gold, which you have to buy with real money, can access.

This new product is complicated with a few issues, namely how it might compensate people for user-generated content that people pay to access, with Reddit's business built on free, user-generated content.

The Reddit Contributor Program, launched in September 2023, could be a foundation; letting users "earn money for their qualifying contributions to the Reddit community”. Reddit says it pays up to $0.01 per 1 Gold received, depending on how much karma the user has earned over the past year.

Market leading creator economy platform Patreon that similarly allows creators to gate access suggests the size of the market willing to pay for this type of content. The outlook isn’t particularly attractive for Reddit’s growth prospects… currently only valued at $1.5 billion (5% the size of Reddit’s $30b market cap).

Similar stories have played out with the larger social platforms like Facebook, YouTube, & TikTok who have all tried, multiple times, and struggled to make consumer subscriptions a meaningful part of their business.

Huffman Wants You to Buy Things on Reddit

Huffman also said that Reddit is “laying the foundation” for the ability to monetize commerce within subreddits this year, including when Reddit users buy something from another user via discussion on a subreddit.

With Reddit marketplace features, Redditors could potentially make these transactions without leaving Reddit. Some subreddits, like r/Watchexchange, where Redditors “buy, sell or trade watches,” are already centered on transactions suggesting a real opportunity for such monetization.

Reddit’s New Secret Revenue Stream

However, despite the bleak outlook for Reddit’s paywalled content they have seemingly built up a highly profitable revenue stream with zero real effort, content licensing.

With the rise of AI, Reddit have capitalized effectively — helping Google & OpenAI train their AI models, and a data & analytics partnership with Intercontinental Exchange (ICE) to provide market sentiment insights — which already represents 10% of total revenue.

This revenue source, however, is entirely dependent on 3 parties — Google, OpenAI, and ICE and as such could drop to $0 just as easily as it grew.

Reddit’s Core Growth Lever

The strategy and executive team at Reddit seem to understand this precarious and potentially temporary position and is making the correct moves — whilst they’ve looked at new features, their core focus remains on improving the ads business.

Throughout the course of their life Reddit has remained one of the poorest monetized ads businesses in the entire market, despite their scale. The reason for this boils down to a core product mechanic, because profiles are largely anonymous Reddit have weak targeting capabilities leading to low click through rates.

Because of this, despite their size, marketers haven’t ever been able to get good enough results from performance marketing, where the majority of digital ad spend goes, to ever make Reddit a real player in the advertising space.

This needs to change if Reddit wants to grow and in January it debuted AMA Ads and Pro Trends to woo mainstream brands.

To continue their progress in growing their ad business Reddit has also invested significant resources into machine learning and AI to enhance ad targeting and user engagement. It acquired Memorable AI in August, a startup that predicts user engagement with ad creative, to bolster ad effectiveness on Reddit. 

The efforts are paying off. The company has doubled its click volume and its conversion volume YoY and recorded significant growth across channels, geographical regions, and verticals in 2024. A particular bright spot has been small- to medium-sized advertisers, which drove “outsized growth” during Q4.