Reddit's Feed Technology Admission and Search Referral Erosion Overshadow Record Profitability in Q2
Earnings call held July 30, 2026, covering second-quarter 2026 results
Reddit delivered another quarter of triple-digit-adjacent growth and record profitability on Thursday, yet the stock sold off sharply as investors zeroed in on a soft patch in U.S. daily active users and a candid admission from CEO Steve Huffman that the company's feed recommendation technology is meaningfully behind the industry's cutting edge. The disconnect between blowout financials and user-growth anxiety dominated the call, with LightShed Partners' Rich Greenfield bluntly telling management that "there is just a sense from investors that you have a user problem."
Huffman Concedes Feed Technology Lags Peers, Outlines a Long Repair List
The most consequential disclosure of the call came when Huffman, pressed by Raymond James' Josh Beck on the mechanics of Reddit's feed overhaul, offered an unusually direct assessment of the company's technical shortfall. "Our models today are smaller than state-of-the-art, significantly smaller," he said, adding that Reddit's models refresh on the order of days versus hours or minutes for leading platforms, and that the company incorporates roughly 10% of user activity into its ranking systems versus a potential ceiling far higher. He also noted the candidate set of content eligible for recommendation is effectively capped at content from the past week, even though much of Reddit's archive, parenting advice, book reviews, movie takes, remains evergreen and currently invisible to the feed. "So we can dramatically improve candidate selection, model size, model speed, the signals that go in from users, pretty much every dimension," Huffman said, framing the gap as opportunity rather than crisis. New talent hired into the machine learning organization over the past quarter is aimed squarely at closing this gap, with Huffman saying he expects "every improvement we make to work because we're just starting from such a low base." For a company valued on its data moat and recommendation engine, the admission that the core product is running on dated infrastructure is a notable data point for investors modeling the durability of engagement gains.
Search Referral Volatility Exposes the AI Overview Threat
Management also provided its most explicit commentary yet on how the shift to AI-generated search summaries is pressuring traffic. Huffman said search referrals were "choppy" in the quarter and grew more volatile late in the period, driven partly by a decline in machine-translated content on the international side. More pointedly, he drew a contrast between the legacy "10 blue links" search model, which he said "has driven tremendous value and growth to the broader ecosystem," and Google's AI Overviews, which "has yet to make a similar level of positive impact" for Reddit, and, in his view, for the broader publisher and retailer ecosystem generally. Reddit's visibility into referral traffic remains low, and management does not expect that to improve, effectively conceding that a piece of its historical growth engine is now structurally impaired and non-negotiable. CFO Drew Vollero's sequential DAU commentary, and the analyst-cited 300,000 sequential decline in U.S. daily actives, appears directly linked to this dynamic, even as management insists the bigger swing factor is within its control.
Data Licensing Optionality Widens Beyond Google and OpenAI
On the closely watched question of AI data licensing renewals, Huffman signaled Reddit is negotiating from a position of expanding leverage rather than dependency on any single buyer. Asked by Greenfield whether Reddit might walk away from licensing deals with Google or OpenAI next year, Huffman declined to characterize the outcome as binary, noting relationships span training, post-training, grounding, and search indexing simultaneously. "One of the things that we've seen over the last year is more and more people interested in Reddit's data for different use cases or at different scales," he said, confirming when pressed that buyers beyond Google and OpenAI are now part of the conversation. This is a meaningfully different posture than a year ago, when the licensing narrative centered almost entirely on two counterparties, and suggests Reddit believes it holds pricing power as the market for authentic human-generated training data broadens.
Reddit Max Scaling Fast as Ad Automation Becomes the Growth Engine
Underneath the user-growth debate, the advertising business continued to fire on all cylinders. Total revenue grew 61% year-over-year to $805 million, with advertising revenue up 64% to $762 million, marking an eighth consecutive quarter above 60% growth. COO Jen Wong detailed the traction of Reddit Max, the company's automated ad buying suite, where advertiser adoption grew over 60% quarter-over-quarter and revenue climbed more than 150% over the same span. Lenovo achieved 40% higher purchase value using Max versus standard campaigns, one of several performance case studies management cited, including online pharmacy DocMorris's 20% lower cost-per-install. Active advertisers grew over 70% year-over-year, and the scaled channel housing mid-market and SMB accounts doubled. Wong called out that "11 out of 15 verticals grew over 50% year-over-year," underscoring the diversification management believes insulates the ad business from any single category's softness.
Profitability Metrics Double, Buybacks Step Up
Vollero highlighted that adjusted EBITDA, net income, GAAP earnings per share, and operating cash flow all more than doubled year-over-year, a rare alignment he called out directly: "It's not often most key profit and cash flow metrics double year-over-year." Adjusted EBITDA margin reached 43%, and the company crossed $1 billion in trailing-twelve-month operating cash flow for the first time. Reddit also hit its long-stated North Star of $1 million in revenue per employee. Share repurchases became a more meaningful capital allocation tool this quarter, with the company buying back roughly $235 million of stock at an average price near $157, leaving $760 million on the current authorization. Full-year stock-based compensation guidance was lowered from high-teens to low-to-mid-teens as a percentage of revenue, and dilution is now tracking toward the low end of the company's 1% to 3% target range.
Guidance Points to a Deliberate Deceleration
For the third quarter, Reddit guided to revenue of $860 million to $870 million, implying 47% to 49% year-over-year growth, a step down from the 61% pace just posted. Adjusted EBITDA guidance of $385 million to $395 million implies a 45% margin at the midpoint. Management framed the deceleration as reflecting both continued momentum and ongoing investment plans rather than a demand problem, though the magnitude of the guided slowdown, nearly 13 points at the midpoint, will likely keep the user-growth debate front and center until the company demonstrates the feed and retention improvements Huffman described are translating into reaccelerating daily actives.