Reddit’s increased reliance on Google traffic has Wall Street anxious

For nearly a decade, Tom Wahlin’s popular travel gear site Pack Hacker ranked high in Google’s search results by publishing deeply researched product reviews.

But something changed this year, as Wahlin noticed that his company’s reviews were often falling below a series of Reddit links. A few weeks ago, for example, Wahlin discovered that when he searched for the Aer Travel Pack 3, Pack Hacker’s review of the premium backpack was no longer leading Google’s results, which it had been for a “very, very long time,” he said.

The Reddit links that preceded his site all sent users to various forums where users discussed the popular travel backpack. In a particular twist of fate, the top Reddit post included several comments about Pack Hacker’s YouTube video review of the bag.

“It’s funny, because we’re mentioned in that Reddit post,” Wahlin said. “Pack Hacker is mentioned a couple of different times, but we’re still below the Reddit result.”

Reddit’s rise in search rankings is the result of a series of updates by Google stemming back to last year that boosted “authentic” content from online forums. Because Reddit dwarfs other forum sites, the 19-year-old company was likely the biggest beneficiary of the Google update, said Lily Ray, the vice president of search engine optimization and research at the Amsive marketing agency.

Amsive found that Reddit is ranked fifth among U.S. sites in terms of visibility in Google’s U.S. organic search results as of July, up from 68^th a year ago.

“I think the rate of growth that Reddit has seen is something pretty unusual for our industry,” Ray said.

The challenge for Reddit, which held its stock market debut five months ago, is to make money off people who land on the company’s website after performing a random query. Reddit calls them logged-out users and, based on some industry estimates, they only monetize at about one-third the rate of logged-in users.

As Reddit said in its financial filings, “logged-out users typically have lower engagement and spend less time on our platform compared to users who are logged in to a registered account.” Getting a greater percentage of them to sign up with Reddit, and even download the app, is critical to the company’s effort to bolster its reputation on Wall Street.

In Reddit’s second-quarter earnings report last week, the company said its user base increased 51% in the second quarter to 91.2 million, outpacing ad revenue growth of 41%. The number of logged-out users surpassed logged-in users in the fourth quarter, and the gap has since widened. Logged-in users increased 31% in the second quarter to 42 million, while logged-out users increased at a much more robust rate of 74% to 49.2 million.

While results for the period ended June topped estimates across the board and Reddit’s net loss narrowed dramatically from a year prior, the stock dropped after the report. Reddit shares have now fallen 26% since peaking in mid-July, and are up just 8% since their IPO pop in March.

Reddit’s business comes almost entirely from digital ads, at least for the moment. The company recently signed data-licensing deals with Google and OpenAI for the training of their large language models that are powering the boom in generative artificial intelligence. Reddit’s “other revenue” category, which includes data licensing, skyrocketed 691% year over year in the quarter to $28.1 million, accounting for 10% of total sales.

Outside of data licensing, Google is the biggest catalyst for Reddit’s growth.

Alan Gould, managing director at Loop Capital, said Google makes up “the vast majority of the logged-out users.” By extension, surging traffic from the search giant is a big reason why Reddit is generating less money from each user in the U.S.

Reddit’s user base in the U.S. increased by 59% in the second quarter from a year earlier. But average revenue per user (ARPU) fell 5% to $4.94 from $5.21. Daniel Konstantinovic, an analyst at eMarketer, noted that logged-out users don’t need to provide personal data like email addresses, which is information that could help Reddit better “track users and deliver ads and target them with specific advertisements.”

“An advertiser is going to look at that and say, OK, well, it doesn’t seem as if I can reach these people more effectively in any way,” Konstantinovic said.

Benjamin Black, an analyst at Deutsche Bank, said “a lot of Reddit monetization actually happens in the home feed,” so the company needs a growing number of logged-out users to create accounts.

“Their logged-out users have been just flocking in and finding value on the platform,” said Black, who recommends buying Reddit shares. “Over time, those convert to logged-in users, and they’ll become more valuable on the platform.”

By 2025, Reddit’s logged-in users could represent an ARPU of $17.60 compared to $5.90 for logged-out users, Black said, based on the firm’s estimates. Reddit doesn’t break out those figures.

Reddit operating chief Jen Wong told analysts on the second-quarter earnings call that the company emphasizes revenue and user growth over ARPU. She said the company is in the “fortunate position of having really strong revenue and user growth with users being a little bit more, and that’s why ARPU is down.”

“It may be a first-class problem that we have in the math of ARPU,” Wong said.

Reddit CEO Steve Huffman said on the earnings call that the company is increasing users and retention driven in part by new features and investments into AI.

“They’ll come, they’ll download our app,” Huffman said. And when they come to the website, all the company’s work “around relevancy and product quality come into play to retain those users,” he said.

Huffman told CNBC that it’s easier than ever for new users to create accounts, due to a streamlined process that requires users to submit either an email address or a phone number or sign in via a Google or Apple account.

“The registration rates have gone way up because we’re losing far fewer users when they sign up,” Huffman said.

Reddit’s improved personalization features also means that new users are recommended more Reddit posts and communities, or subreddits, related to their search queries, keeping them engaged for longer, Huffman said. He added that the company has bolstered the overall speed of the site, making it a better experience for new users.

“User retention has grown, which is leading to the logged-in growth, which is something we’re really happy with,” Huffman said. He said the 31% year-over-year increase in logged-in users in the second quarter is the highest in years.

Still, some experts are skeptical that logged-out users will choose to stick around after they land on a particular Reddit post.

“I just don’t see a clear path to getting someone who’s going to Reddit through Google to logging in and spending more time on it beyond whatever it is that they’re specifically looking for,” Konstantinovic said. “If you look at the changes that Google has made, it’s all about surfacing the answer or the desired result as quickly as possible, so it doesn’t really make sense that the user would then go to Reddit and spend even more time there on stuff that is not specific to their query.”

Reddit also faces the risk any company confronts when traffic is reliant on Google, because the algorithm can change at any time. Reddit acknowledges in its filings that “changes in internet search engine algorithms and dynamics could have a negative impact on traffic for our website and, ultimately, our business, results of operations, financial condition, and prospects.”

It’s a problem that many websites have faced over the years, from recipe sites to online coupon providers. And it was an algorithm tweak that pushed Pack Hacker’s reviews below Reddit content earlier this year.

“Some brands survive and some brands die,” said Wahlin, who sold Pack Hacker to outdoor and fitness publisher AllGear Digital in January, though he still oversees editorial operations. “Things always change.”

Wahlin said his traffic from Google hasn’t totally fallen off, and that he’s long been preparing for a potential change in the algorithm by diversifying his business with YouTube channels, a paid membership program and brand recognition that makes Pack Hacker a destination site.

Reddit is currently the beneficiary of Google’s algorithm, but that can change.

“We definitely talk about it in the SEO space — like buying stock, buying Reddit stock — because they just keep going up on Google,” Ray, the SEO expert, said. “But it’s just impossible to know how long it’s going to last and if it’s going to continue.”

Google declined to comment. The company pointed to previous blog posts about how it’s prioritizing content that features more human voices and perspectives.

Huffman said Reddit has a history of growing its user base “without SEO, because you don’t get the search traffic unless you have content in the index.” Huffman said the company built content “entirely through word of mount” for about the first decade.

Huffman described Reddit’s direct traffic as “really resilient” regardless of what Google is doing.

“That’s different than other publishers or content platforms where the content is more commoditized,” he said. “Reddit is truly unique, and so that’s a real strength.”