Strong user growth has helped Reddit Inc.’s stock rise significantly since the social media company’s IPO a year ago, but an analyst at Redburn Atlantic is concerned that Google’s algorithm could suddenly turn against Reddit.
The stock (RDDT) has risen 171% since its explosive launch on March 21, 2024.
According to a note sent to clients by Redburn Atlantic analyst James Cordwell, “Reddit’s financial performance has been stellar since its IPO in March 2024, but consensus expectations fail to appreciate the vulnerability of Reddit’s growth to Google Search and the structural challenges of Reddit’s nascent advertising proposition.”
He claimed that Reddit shares are trading “at an unjustified premium to peers,” raising concerns that Wall Street expectations may be too high.
Reddit’s stock was first covered by Cordwell, who set a $75 price target and a sell rating. On Monday, the stock is down almost 2%.
For the first time in the first quarter, Reddit’s daily active unique users surpassed 100 million, although Cordwell remarked that he thinks the platform’s potential, range of appeal, and consequently its worth as a business are being exaggerated.
“For much of its 20-year existence, Reddit remained a niche forum-based platform and the company’s prospects changed only in mid-2023, with the platform almost doubling in size over the following 18 months,” he stated. “This outsized growth has been misconstrued as an indicator of Reddit’s ultimate potential, but our analysis suggests it is largely artificial, and we see little reason to believe that the platform is any less niche than it always has been.”
In light of this, Redburn Atlantic predicts that Reddit’s user growth will plateau this year. “The strong growth of the past 18 months has been predominantly the result of Google changing its search algorithm to favour Reddit, but there is clear evidence that the boost to traffic and visibility from these changes is hitting a ceiling, with a risk that what Google giveth, it will taketh away,” he stated.
Reddit’s user growth for the most recent quarter fell short of Wall Street’s forecasts, despite the milestone accomplishment. In a letter to shareholders, Reddit CEO Steve Huffman stated that while some “volatility” brought on by a change in the search algorithm introduced by Alphabet’s (GOOG) (GOOGL) Google Search affected user counts in the fourth quarter, traffic has since recovered in the current quarter. He stated, “There’s zero concern from us in this department,” when discussing the findings over a conference call.
Reddit’s global daily active unique users increased 46% year over year in the fourth quarter, surpassing the 32% rise in the U.S.
The number of unique daily active users worldwide who spend the most time on Reddit increased by 27% to 46.1 million.
The company has been viewed more optimistically by other analysts. Fifteen out of the twenty-four analysts FactSet polled have an overweight or buy rating on Reddit’s stock, eight have a hold rating, and one has an underweight recommendation.
An analyst at Raymond James stated in a note published last week that Reddit’s market opportunity is growing due to AI search.
Josh Beck, played by Raymond James, decided that, given the current economic climate, Reddit’s “unique text corpus of curated, authentic human discussion” would be better served by AI and vertical search than by them. He lowered his price estimate for Reddit from $250 to $200. Compared to a conventional web search, vertical search yields more focused results by concentrating on a single subject. Reddit is enhancing its on-platform search, which may generate up to $100 million in revenue the next year, according to Beck.
Analysts predicted last year that Reddit was in a strong position to leverage its enormous user data base as a powerful AI resource. The firm revealed a collaboration with OpenAI in May, and in December, it extended the beta test of Reddit Answers, an AI-powered tool that helps users locate what they’re looking for.
