Wall Street is anxious to see if Reddit's increased reliance on Google traffic will result in new sign-ups.

• Google search results now feature Reddit prominently after a series of updates.
• To increase ad revenue, Reddit, which went public in March, must persuade more of its visitors to sign up for official accounts, as logged-in users generate significantly higher rates of revenue.
• Since last month, Reddit's stock shares have experienced a 26% decline.

For nearly a decade, Pack Hacker's travel gear site ranked highly in search results due to its deeply researched product reviews.

Wahlin observed that his company's reviews were frequently below average, as he discovered when he searched for the Aer Travel Pack 3 on Google and found that Pack Hacker's review of the premium backpack was no longer the top result, despite it having been so for a long time.

Reddit links led users to different forums discussing a popular travel backpack. In a coincidence, the top Reddit post contained comments about Pack Hacker's YouTube video review of the bag.

""We're mentioned in that Reddit post, but Pack Hacker is only mentioned a couple of times and we're still below the Reddit result," Wahlin said."

The increase in Reddit's search rankings is due to Google's updates from last year that prioritize "authentic" content from online forums. As the largest forum site, Reddit likely benefited the most from this update, according to Lily Ray, vice president of search engine optimization and research at Amsive marketing agency.

As of July, Reddit is ranked fifth among U.S. sites in terms of visibility in Google's U.S. organic search results, up from 68th a year ago.

Ray remarked that the growth rate of Reddit was unusual for our industry, he thought.

Reddit, which went public five months ago, faces the challenge of generating revenue from users who visit the company's website after conducting a random search. These users, referred to as logged-out users, contribute to only one-third of the revenue generated by logged-in users, according to industry estimates.

To increase its engagement and revenue on Wall Street, Reddit must focus on increasing the number of registered users and app downloads among its logged-out users.

In the second quarter, Reddit's user base grew by 51% to 91.2 million, while ad revenue only grew by 41%. In the fourth quarter, the number of logged-out users surpassed logged-in users, and the gap has since widened. Logged-in users increased by 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.

Despite beating estimates and seeing a significant reduction in net loss, Reddit's stock dropped after the report. Since peaking in mid-July, the stock has fallen 26%, and has only gained 8% since its IPO in March.

Reddit generates almost all of its revenue from digital ads, but recently signed data-licensing deals with Google and OpenAI to train their large language models. The company's "other revenue" category, which includes data licensing, saw a 691% increase year over year in the quarter, accounting for 10% of total sales.

Reddit's growth is primarily driven by factors other than data licensing, with Google being the largest contributor.

According to Alan Gould, managing director at Loop Capital, the majority of logged-out users on Reddit are from Google. As a result, the surge in traffic from the search giant is contributing to a decrease in revenue per user in the U.S.

'First-class problem'

In the second quarter, the number of Reddit users in the U.S. grew by 59%, but the average revenue per user (ARPU) decreased by 5% to $4.94 from $5.21. According to eMarketer analyst Daniel Konstantinovic, logged-out users do not need to provide personal data such as email addresses, which could help Reddit better "track users and deliver ads and target them with specific advertisements."

Konstantinovic stated that an advertiser would likely conclude that there is no more effective way to reach those people after examining the situation.

According to Benjamin Black, an analyst at Deutsche Bank, a significant amount of Reddit's monetization takes place in the home feed. Therefore, the company requires an increasing number of logged-out users to sign up for accounts.

"Black advised buying Reddit shares, stating that their logged-out users are frequently joining the platform and discovering its value. As these users eventually log in, they will become more valuable to the platform."

According to Black, Reddit's logged-in users could generate an average revenue per user of $17.60 compared to $5.90 for logged-out users, based on the company's estimates. Reddit does not provide these figures.

Jen Wong, the operating chief of Reddit, informed analysts during the second-quarter earnings call that the company prioritizes revenue and user growth over ARPU. She explained that the company is in a fortunate position to have strong revenue and user growth, with users being slightly more engaged, which is why ARPU is down.

Wong stated that the issue at hand could be a top-notch problem in the field of ARPU mathematics.

On the earnings call, Steve Huffman, CEO of Reddit, stated that the company's growth in users and retention is being driven by the introduction of new features and increased investments in AI.

Huffman stated that when users visit the website, the company's focus on relevancy and product quality will be crucial in keeping them engaged.

New users can easily create accounts with Huffman, as the process has been simplified to only require an email address, phone number, or sign-in via a Google or Apple account.

"Because we're retaining more users during sign-up, the registration rates have significantly increased," Huffman stated.

New users on Reddit are recommended more relevant posts and communities, keeping them engaged for longer, thanks to the site's improved personalization features, Huffman said. Additionally, the company has increased the overall speed of the site, enhancing the user experience.

The increase in logged-in users in the second quarter, which is a 31% year-over-year growth, has led to user retention, something we are pleased with, according to Huffman.

Some experts doubt that non-logged-in users will remain on a specific Reddit post after they arrive.

"Konstantinovic stated that he couldn't see a clear path for someone who found someone on Reddit through Google to log in and spend more time on the platform beyond what they were specifically looking for. He explained that Google's changes were focused on quickly providing the answer or desired result, so it didn't make sense for the user to then spend more time on Reddit on topics that were not related to their query."

Google risk

Reddit faces the risk that any company faces when its traffic is dependent on Google, as the algorithm can change at any time. According to Reddit's filings, changes in internet search engine algorithms and dynamics could negatively impact the website's traffic, ultimately affecting its business, financial condition, and prospects.

Many websites, including recipe sites and online coupon providers, have faced the issue of their content being pushed below Reddit's content due to an algorithm tweak.

"AllGear Digital acquired Pack Hacker from Wahlin in January, who continues to oversee editorial operations. Wahlin stated, 'Some brands endure while others fade away, and things are always in flux.'"

Pack Hacker's Wahlin stated that although his Google traffic has not completely disappeared, he has been preparing for a possible algorithm change by diversifying his business through YouTube channels, a paid membership program, and brand recognition, making Pack Hacker a destination site.

Google's algorithm currently favors Reddit, but this could change in the future.

"Ray, the SEO expert, stated that they definitely discuss the topic of buying Reddit stock in the SEO space, as it has been consistently increasing on Google. However, he acknowledged that it is impossible to predict how long this trend will continue or if it will eventually reverse."

Google declined to comment on the matter, but in previous blog posts, the company has emphasized its focus on content that includes more human voices and perspectives.

Huffman stated that Reddit has a history of expanding its user base "without SEO, as you don't receive search traffic unless you have content in the index." He added that the company relied on word-of-mouth marketing for about the first decade to build its content.

Despite any changes Google makes, Huffman stated that Reddit's direct traffic remains robust.

""Unlike other publishers or content platforms, where the content is more commoditized, Reddit is truly unique, which is a real strength," he said."

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