Hedgehog (HH) signaling is important for embryonic pattering and stem cell differentiation. The G protein-coupled receptor (GPCR) Smoothened (SMO) is the key HH signal transducer modulating both transcription-dependent and transcription-independent responses. We show that SMO protects naive mouse embryonic stem cells (ESCs) from dissociation-induced cell death. We exploited this SMO dependency to perform a genetic screen in haploid ESCs where we identify the Golgi proteins TMED2 and TMED10 as factors for SMO regulation. Super-resolution microscopy shows that SMO is normally retained in the endoplasmic reticulum (ER) and Golgi compartments, and we demonstrate that TMED2 binds to SMO, preventing localization to the plasma membrane. Mutation of TMED2 allows SMO accumulation at the plasma membrane, recapitulating early events after HH stimulation. We demonstrate the physiologic relevance of this interaction in neural differentiation, where TMED2 functions to repress HH signal strength. Identification of TMED2 as a binder and upstream regulator of SMO opens the way for unraveling the events in the ER-Golgi leading to HH signaling activation.