With its first anniversary approaching, Reddit's IPO was a clear hit as the stock surged more than 150% from its opening price. But trading has been far rockier in recent weeks, with Reddit stock down more 30% year-to-date.
That includes a 12% loss in Tuesday trading and another slight decline Wednesday. The drop sets Reddit stock up for a sixth straight losing week. Concerns about tariffs and the broader U.S. economy have some investors turning away from the same tech stocks that rallied last year. But Wall Street is also debating whether Reddit can sustain its rapid user and advertising growth, particularly because the user-forum site relies heavily on Alphabet-owned Google search referrals.
"While Reddit's financial performance has been stellar since its IPO in March 2024, consensus expectations fail to appreciate the vulnerability of Reddit's growth to Google Search and the structural challenges of Reddit's nascent advertising proposition," Redburn Atlantic analysts James Cordwell and Joseph Barker said in a research note Monday.
Redburn Atlantic initiated coverage of Reddit with a sell call and price target of 75 in the research note. The bearish call underscores the debate about Reddit's positioning after a rally that powered Reddit to a higher valuation than larger social media players such as Pinterest and Snapchat parent Snap.
Reddit Stock: IPO Rally
Reddit stock debuted on the New York Stock Exchange on March 21 last year at a price of 34. By the end of the year, Reddit stock was trading at 163.44, a 370% rally from its opening price and 225% jump compared to its first-day closing price.
Shares of the San Francisco-based company racked up their fastest gains late in the year, following a strong third-quarter earnings report published in October. The results showed 68% sales growth and a surprise profit.
Reddit also had a big year for user growth, reaching 100 million daily active users by the end of 2024.
Q4 Results Highlight Google Concerns
However, Reddit's fourth-quarter results in February left some investors uneasy, causing the stock to fall 5%.
The company's daily user growth slowed to 37% year over year, compared to 47% growth in the third quarter. Reddit said user traffic faced "volatility" during the quarter because of search algorithm changes by Google. But Chief Executive Steve Huffman told analysts on the Feb. 12 conference call that the company had "regained momentum."
Some analysts remain concerned. The report served as a reminder that Google is a crucial funnel for Reddit to find users.
"The strong growth of the past 18 months has been predominantly the result of Google changing its search algorithm to favor 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," Redburn Atlantic's research report said.
The Redburn Atlantic analysts project that Reddit's daily active user growth will slow to 19% in 2025. That will leave Reddit reliant on boosting the ad revenue it makes per user in order to meet Wall Street's growth estimates, something that Cordwell and Barker wrote has been difficult historically for "text-based format" social media.
Investors are clearly watching the Google-Reddit relationship closely. The same day as the Redburn Atlantic analyst note, Reddit stock jumped on a report of an expanded partnership with Google. But the report turned out to be based on "outdated information" and Reddit quickly gave back the gains.
Reddit Stock Slumping Since Q4
Meanwhile, Reddit has taken steps to drive more users directly to its website. That includes a feature called Reddit Answers, which uses generative AI to summarize the huge amounts of posts on the website based on user prompts.
Wall Street remains more bullish than not overall, with 60% of the 25 analysts following Reddit stock calling it a buy, according to FactSet.
Deutsche Bank analyst Benjamin Black last week published a bullish take on Reddit, following a panel conversation with Huffman at a tech investor conference hosted by the bank.
Black, who rates Reddit a buy, said Reddit is "fully recovered" from the Google disruption and is focused on driving more frequent visits from its 170 million weekly active users in the U.S.
"Bigger picture, with the stock down roughly 40% since earnings, we believe user growth concerns are more than priced in at today's levels, especially considering that ad revenue growth momentum remains intact," Black wrote.
Reddit Stock Tests 200-Day Line
Reddit stock slipped a fraction to close at 109.91 on Wednesday. The move pushed Reddit stock below its 200-day moving average.
The stock's Relative Strength score remains a strong 95 out of a best-possible 99, showing how Reddit has outperformed over the past 12 months.
But Reddit's IBD Composite score has fallen from a near-perfect 98 to an 87 out of 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
Reddit's lowest mark contributing to that score is a D- Accumulation/Distribution Rating. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading by institutions. The D- score indicates heavy institutional selling in recent weeks.
