Shares of Reddit (RDDT) experienced a significant decline on Monday, dropping by 12.3% as of 1:25 p.m. ET, with a peak decrease of 12.4% earlier in the day. This decline occurred alongside a 1.2% fall in the S&P 500 (^GSPC) and a 1.4% loss in the Nasdaq Composite (^IXIC). The social media company received unfavorable coverage from Wall Street analysts.
Redburn Atlantic analysts, James Cordwell and Joseph Barker, began their coverage of Reddit with a “sell” recommendation, establishing a price target of $75, the lowest to date. Despite Reddit’s notable user growth, the analysts expressed skepticism about its long-term sustainability, attributing much of this growth to algorithm changes made by Alphabet’s Google. These changes resulted in Reddit nearly doubling its size over the past 18 months. However, the analysts argue that the majority of this growth consists of users seeking answers to specific questions without converting to logged-in users, who are seen as more valuable.
The analysts predicted that such user growth would not persist at the previous rate, indicating that the benefits from the algorithm changes have reached a plateau. They cautioned that the boost provided by Google could eventually be reversed.
Further challenges for Reddit involve advertising effectiveness. Cordwell and Barker emphasized that the user growth, which attracted investor interest, might be misleading given the nature of the users driving this traffic. Additionally, Reddit differs from other social media platforms like Instagram and TikTok, which the analysts suggest may impact the effectiveness of advertising. They noted that, as a platform primarily driven by text, Reddit’s advertising impact could be less significant than its peers.
