MW Reddit's stock has soared 170% since the IPO. Here's why the honeymoon may now be over.

By James Rogers

Reddit's growth is vulnerable to the whims of search giant Google, according to Redburn Atlantic, which has slapped a sell rating on the stock

Reddit Inc.'s stock has enjoyed significant gains since the social-media company's initial public offering a year ago, buoyed by strong user growth, but an analyst at Redburn Atlantic worries that Google's algorithm could turn against Reddit at any time.

The stock (RDDT) has surged 171% percent since making a roaring debut on March 21, 2024.

"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," wrote Redburn Atlantic analyst James Cordwell in a note to clients.

Concerned that Wall Street expectations might be too high, he said that Reddit shares trade "at an unjustified premium to peers."

Related: Reddit turns second quarterly profit since IPO but shares slide on user-growth miss

Cordwell initiated coverage of Reddit's stock with a sell rating and a $75 price target. The stock was off about 2% in Monday action.

Reddit's daily active unique users topped 100 million for the first time in the first quarter, but Cordwell said he believes Reddit's potential, breadth of appeal and thus value as a company are being overstated.

"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 wrote. "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."

Set against this backdrop, Redburn Atlantic expects Reddit's user growth to stall 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 wrote.

Related: Reddit's Google traffic 'curveball' is a buying opportunity for investors, analyst says

Despite the milestone performance, Reddit's user growth last quarter came in below Wall Street's expectations. In a letter to shareholders Reddit Chief Executive Steve Huffman said that user numbers were impacted in the fourth quarter by some "volatility" caused by a search-algorithm change made by Alphabet $(GOOG)$ $(GOOGL)$ unit Google Search, but that traffic has recovered in the current quarter. "There's zero concern from us in this department," he said, during a conference call to discuss the results.

During the fourth quarter, Reddit's international daily active unique users grew 46% on a year-over-year basis, outpacing the 32% growth seen in the U.S.

Reddit's global logged-in daily active unique users, who spend the most time on the platform, grew 27% to 46.1 million.

Related: Reddit's stock climbs after Jefferies initiates coverage with a buy rating

Other analysts have expressed more bullish sentiments about the company. Of 24 analysts surveyed by FactSet, 15 have an overweight or buy rating on the stock, eight have hold ratings, and one has an underweight rating on Reddit's stock.

In a note released last week an analyst at Raymond James said that AI search is expanding Reddit's market opportunity.

The "unique text corpus of curated, authentic human discussion" at Reddit is more likely complemented than disrupted by AI and vertical search, according to Raymond James's Josh Beck, who trimmed his Reddit price target to $200 from $250 in light of the economic backdrop. Vertical search focuses on a specific topic to provide results that are more targeted than a traditional web search. Beck noted that Reddit is improving its on-platform search, which could add up to $100 million in revenue next year.

Last year analysts said that Reddit was well-positioned to turn its vast trove of user data into a compelling resource for AI. In May the company announced a partnership with OpenAI and, in December, expanded its beta test of Reddit Answers, an AI-powered feature designed to make it easier for users to find what they are looking for.

Related: Reddit's stock gets a boost as social-media platform ramps up AI-powered search with Reddit Answers

-James Rogers

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March 17, 2025 19:20 ET (23:20 GMT)

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