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Shares of Reddit (RDDT) experienced a significant decline on Monday, with a drop of 12.3% reported by 1:25 p.m. ET. Earlier, the stock had plummeted as much as 12.4%. This downturn coincided with a broader market slump, as the S&P 500 (^GSPC) fell by 1.2% and the Nasdaq Composite (^IXIC) declined by 1.4%.
Reddit’s Growth Potential Under Scrutiny
Recent analysis from Redburn Atlantic, conducted by analysts James Cordwell and Joseph Barker, has raised concerns about Reddit’s growth trajectory. They initiated coverage with a “sell” recommendation and set a notably low price target of $75 per share. Despite reporting impressive user growth, the analysts express skepticism regarding its longevity, suggesting that this uptick is largely a result of favorable changes in Google’s algorithms.
According to the analysts, these algorithm modifications enabled Reddit to nearly double its user base over the past 18 months. However, they argue that this surge primarily consists of users attempting to find specific answers rather than converting into registered, logged-in users, who represent a more significant revenue-generating demographic for the platform.
Furthermore, Cordwell and Barker emphasize that the rapid user growth observed may not be sustainable. They remarked, “There is clear evidence that the boost to traffic and visibility from these changes is hitting a ceiling,” and cautioned that “what Google giveth, it will taketh away.”
Advertising Effectiveness in Question
The analysts further articulate concerns regarding the advertising landscape for Reddit. They argue that the nature of the user traffic may have been misinterpreted by investors, casting doubt on the platform’s ability to monetize its user base effectively compared to competitors like Instagram and TikTok. Given Reddit’s primarily text-based format, there is skepticism about the lasting impact of its advertising initiatives.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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