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

By James Rogers

Reddit shares slid on the company's fourth-quarter miss in user growth

The selloff of Reddit Inc. shares that followed the social-media company's surprise fourth-quarter user-growth miss represents an opportunity for investors, according to analyst firm Raymond James.

Reddit's stock (RDDT) was down 8.8% at 9:34 a.m. Eastern time after the company said that user-growth numbers were affected by Google search "volatility" triggered by an algorithmic change. The stock is on pace for its biggest daily percentage decrease since March 28, 2024, when it fell 14.6%, Dow Jones Market Data show.

But in a note released Wednesday, Raymond James analyst Josh Beck wrote that Reddit's "Google traffic curveball" equals a buying opportunity. Raymond James noted that Google's algorithm changes likely contributed to the unexpected miss in U.S. daily active unique users. Given the importance of late-quarter ad spending, this likely constrained Reddit to revenue that beat consensus estimates by about 5%, according to Beck, below Raymond James's forecast for a beat of about 9.5%.

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

However, Beck pointed to comments from Reddit's management regarding a sharp recovery in daily active unique users. That was likely driven by Google benefiting from deeper Reddit crawling, by the platform uncollapsing comments in search results and by a potential benefit from spam-reduction algorithm updates, according to the analyst. "While the report did not clear our anticipated bar, we walk away encouraged by international upside," he wrote.

During the fourth quarter, Reddit's international daily active unique users grew 46% to 53.7 million in the quarter, outpacing the U.S., where daily active unique users grew 32% to 48 million.

Reddit defines a daily active unique as a user the company can identify with a unique identifier and who has visited a page on the Reddit website or opened a Reddit application at least once over a 24-hour period.

Related: Reddit teams with Intercontinental Exchange to build financial-analytics products

In his note, Beck also said that he is encouraged by Reddit's ad progress and an "early positive response" from Reddit Answers. This, he said, is likely combined with search to improve Reddit's searchability. Raymond James maintained its strong buy rating for Reddit.

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

In December Reddit expanded its beta test of Reddit Answers with a feature powered by artificial intelligence that is designed to make it easier for users to find what they are looking for.

"Although it's still in its early stages, it's already proven versatile as people turned to it for everything from local updates about the LA wildfires to opinions on the best coffee maker," Chief Executive Steve Huffman said during the conference call to discuss Reddit's results. "When it comes to Answers, we see that Reddit excels at providing insightful responses to questions with subjective Answers that are difficult to find elsewhere."

Huffman noted that Reddit Answers is currently only available in English. "We're excited about how people are using it and the early promise of this product," he added.

Related: Reddit has sold most of its cryptocurrency portfolio

Reddit shares have risen 291.4% since the company's initial public offering in March 2024.

-James Rogers

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February 13, 2025 09:55 ET (14:55 GMT)

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