Renowned Wall Street investment firm Redburn Atlantic recently highlighted concerns about Reddit Inc. (RDDT), known as the "American version of Tieba." Analysts argue that Reddit's user growth, largely driven by Alphabet Inc.'s Google, has led to excessive market optimism, potentially resulting in a significant stock price decline. Redburn Atlantic analysts James Cordwell and Joseph Barker initiated a "sell" rating for Reddit with a 12-month target price of $75, indicating a potential 40% decline from current levels.
Despite Reddit's impressive financial performance since its IPO, the analysts warn that investors may not fully understand the platform's vulnerability to Google Search. They predict Reddit's user growth will stagnate by 2025, stating that Reddit's performance, user growth potential, and company value have been overestimated.
Currently, Reddit's stock price has fallen 2% to $125.56, with a year-to-date decline exceeding 23%, underperforming the S&P 500 and Nasdaq Composite indices. Reddit went public in March 2024, with its stock soaring 383% throughout the year, partly due to data licensing agreements with AI leaders like OpenAI and Google.
Redburn Atlantic attributes much of Reddit's user growth and revenue to Google's influence. While 15 Wall Street firms rate Reddit as a "buy," only three, including Redburn Atlantic, recommend "sell." Cordwell and Barker's $75 target is the lowest among analysts, contrasting with Morgan Stanley's optimistic $210 target, citing AI agreements and increased user engagement.
The analysts note that Reddit's growth has been driven primarily by unregistered or logged-out users accessing the platform via Google Search. These users contribute less value as they spend minimal time on the platform. Evidence suggests that the benefits from Google's algorithm changes are reaching a ceiling, posing a risk of reversal.
Cordwell and Barker highlight Reddit's slowing user growth in Q4, attributing it to changes in Google's algorithms. With Google accounting for 50% of Reddit's daily traffic in recent years, they foresee user growth halting entirely by 2025. Consequently, Reddit's revenue growth will increasingly depend on attracting advertisers, an area where the platform currently lacks competitiveness compared to peers with advanced ad technologies.
