Since last Friday, shares of Reddit, the well-known online content forum, have decreased by 14% as of 11:38 a.m. ET on Thursday. The downturn follows increasing bearish sentiment from analysts regarding the company’s outlook for the year, alongside CEO Steve Huffman’s recent sale of $15.8 million worth of stock.
Dependence on Google
Reddit’s stock has shown significant appreciation since its public listing in March 2024, starting at $46 on the initial day of trading and reaching a peak of $225 in February. However, this upward trajectory has been disrupted, with the current trading price around $110, though the stock maintains an increase of nearly 140% since its initial public offering. Recently, analysts have expressed concerns over the company’s dependency on Google.
In a research note released earlier this week, James Cordwell and Joseph Barker from Redburn Atlantic highlighted, "The substantial growth observed over the past 18 months primarily stems from Google’s adjustments to its search algorithm favoring Reddit. However, there is evident indication that the traffic and visibility enhancements from these changes are reaching a limit, posing the risk that Google’s support might not be permanent."
Cordwell and Barker have issued a sell rating for the stock, setting a price target at $75. Although Huffman sold a considerable portion of his shares, these sales were pre-planned, and he continues to hold a significant amount.
Are growth concerns priced in?
Deutsche Bank analyst Benjamin Black suggests that the worries regarding Google’s influence and Reddit’s growth might be adequately reflected in the current stock price, which has dropped notably since early February. Despite the recent decline, Reddit’s valuation remains at 36 times its forward earnings. This figure indicates that while the stock is not inexpensive, it is more reasonably priced than before.
The platform is regarded positively, with many users finding it beneficial. However, monetizing social media platforms remains challenging. While there is optimism for Reddit’s long-term potential, the stock is expected to experience volatility in the short term, highlighting the importance of understanding these risks before investing.
Bram Berkowitz, who authored the analysis, holds no position in any of the mentioned stocks. The article also states that The Motley Fool does not have any positions in these stocks but adheres to a disclosure policy.
