Wall Street is growing uncertain on Reddit (RDDT). The social media platform’s stock is reeling after a Wells Fargo analyst downgraded it to Hold over concerns of Reddit’s long-term traffic and monetization model. The really concerning thing for Reddit investors is that the same analyst had reiterated a bullish position merely two weeks prior. So what changed?
Confident Investing Starts Here:
The worry stems primarily from Google’s (GOOGL) accelerating rollout of AI search tools, which some believe could hinder Reddit’s user acquisition and advertising revenue. More specifically, Google’s AI-driven approach to obtaining information could replace Reddit’s model, making it largely redundant in an AI-powered world. Given Reddit’s reliance on logged-out users for traffic, these trends make me bearish on RDDT.
Standard Search Under Threat as AI Search Disrupts Organic Traffic
We’ve all done it. When we have a question about something unique, we turn to Google for an answer. Often, the first result is a Reddit post. This is a feature of Google’s search algorithm and a testament to Reddit’s effectiveness as a source of information in organic search. Of course, the more eyes on Reddit, the more users join its site and become monetizable. This is Reddit’s “bread and butter.”
However, Google’s development of AI-powered features could threaten Reddit. Google’s AI Overviews and AI Mode provide users with direct, summarized answers within search results, removing the need to click on a third-party website like Reddit. Ken Gawrelski from U.S. bank Wells Fargo pointed out that Google’s AI advancements threaten Reddit’s logged-out user base. While they only contribute around 15% of direct ad revenue, they represent about half of Reddit’s user base. Critically, advertising revenue accounts for the vast majority of total revenue.
Notably, in its Q1 earnings results, ad revenue was $358.6 million (up 61% year-over-year) and total revenue was $392.4 million. The expected decline in logged-out users caused Wells Fargo to revise its 2026 and 2027 ad revenue forecasts downward by 6% and 14%, respectively. This is no minor change.
Beyond AI overviews, Google’s newfound emphasis on E-A-T (Expertise, Authoritativeness, Trustworthiness) standards in its algorithm impacts Reddit’s organic traffic. Not all anonymous Reddit posters meet these standards, which jeopardize Reddit’s visibility in search results.
Reddit’s Internal Efforts and Data Dilemmas
Reddit is aware of existing rends and is actively developing its AI-powered search, otherwise known as “Reddit Answers.” This integrates into its primary search experience, which aims to retain users who might otherwise turn to external AI tools. There’s also a sci-fi element to all this. AI-generated content and bots on the internet pose unique threats to Reddit. The company must work to preserve human interaction, especially as its users are anonymous and AI bots cannot be monetized.
Ironically, Reddit’s data licensing agreement with Google, reportedly worth around $60 million annually, also threatens the company’s ability to keep its users within its ecosystem. While this diversifies Reddit’s revenue by providing a high-margin revenue stream, it gives Google the data to strengthen its AI search capabilities. Meanwhile, Reddit is seeing steady growth in Total Daily Active Users, or DAUs.
Moving forward, Reddit’s ability to maintain growth in DAUs and maximize revenue from each one will be crucial for its success. Notably, Reddit is priced for success. For instance, its stock trades at a price-to-earnings (P/E) ratio of 163, over 6x Meta Platform’s (META) stock. This means that investors are paying a sky-high premium for each dollar of Reddit’s earnings. To justify the premium, Reddit must meet future growth and profitability expectations.
Is Reddit Stock a Good Buy?
On Wall Street, Reddit carries a Moderate Buy consensus rating based on 12 Buy, eight Hold, and one Sell ratings in the past three months. Reddit’s average stock price target of $149.35 represents a 54% upside potential over the next 12 months.
Not everyone is as cautious as Ken Gawrelski. Earlier this month, Citi analyst Ronald Josey issued a Buy rating on RDDT, noting its strong first-quarter performance. Moreover, the analyst is particularly impressed by Reddit’s new features, like Reddit Answers, and international growth. Regarding that last point, Reddit posted international revenues of $78.5 million in the first quarter, representing 82% year-over-year growth.
Seaport Research analyst Aaron Kessler, who also has a Buy rating on RDDT with a price target of $165, called Reddit a “long-term opportunity,” citing the social media platform’s ability to grow DAUs and monetize growth.
The AI Test for Reddit’s Long-Term Viability
AI advancements have unexpected implications on Reddit. The emerging relevance of AI in search presents a serious problem for Reddit. Moreover, Google’s E-A-T standards are squeezing out Reddit content as well. Despite strong revenue and DAU growth, perhaps this is a good time for investors to reevaluate Reddit’s prospects, just like the market is currently doing.
On the other hand, it’s not all bleak. Reddit’s proactive development of Reddit Answers could help retain users within its ecosystem. Licensing deals with Google and other AI hyperscalers do provide a high-margin revenue stream in the short term. Finally, Reddit’s strong community, growing international presence, and potential for new feature adoption are compelling reasons for long-term optimism.
However, for me personally, the combination of a premium stock valuation and trends in Google search is a strong reason for extreme caution.
Disclaimer & Disclosure
Looking for a trading platform? Check out TipRanks’
Best Online Brokers
, and find the ideal broker for your trades.
Report an Issue