May 23 – Ken Gawrelski at Wells Fargo downgraded Reddit (NYSE:RDDT) to Hold, warning that Google’s (NASDAQ:GOOGL) AI-powered search features mark the beginning of the end for the social media site.
The analyst had maintained a bullish view just two weeks earlier, making his abrupt turnaround notable.
He flagged Google’s AI Overviews and AI Mode, which deliver direct, summarized answers and could cut clicks to Reddit’s posts. E-A-T standards in Google’s algorithm may further diminish the visibility of anonymous contributions.
Logged-out users account for about half of Reddit’s audience but generate only around 15% of ad revenue, leaving the platform vulnerable as Google siphons organic traffic.
In its Q1 results, Reddit posted ad revenue of US$358.6 million, up 61% year-on-year, and total revenue of US$392.4 million. Despite that growth, Wells Fargo trimmed its ad revenue forecasts for fiscal 2026 and 2027 by 6% and 14%, respectively.
Reddit is rolling out Reddit Answers, an AI-enhanced search tool designed to keep users engaged on its site.
Its data licensing agreement with Google, valued at roughly US$60 million annually, diversifies revenue but also bolsters Google’s AI capabilities.
Trading at a P/E ratio of 163, well above peers like Meta Platforms (NASDAQ:META), Reddit likely must boost user engagement and ad monetization to justify its premium valuation.
This article first appeared on GuruFocus.