Reddit’s 50% plunge fails to entice buyers as growth slows

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The gloomy sentiment around Reddit Inc. has failed to dissipate after its shares fell 50 per cent from a February high, with volatile technology stocks under pressure.

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The social media platform has struggled to recover since an earnings report in February showed that it is failing to keep up with larger digital advertising peers such as Meta Platforms Inc. and Alphabet Inc.’s Google, which have higher user figures. Reddit’s outlook seemed precarious because its United States traffic took a hit from a change in Google’s search algorithm.

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In recent weeks, the short interest in Reddit — a proxy for the volume of bets against the company — has ticked up, and forecasts for the company’s share price have fallen. One analyst opened coverage of Reddit this month with a recommendation that investors sell the shares, in part due to the company’s heavy reliance on Google. Reddit shares fell more than five per cent in intraday trading Friday.

“It’s been super overvalued,” Bob Lang, founder and chief options analyst at Explosive Options said of Reddit. “Their growth rate is very strong, but they still are not making any money.”

Reddit had a GAAP earnings per share loss of US$3.33 in 2024, but reported two consecutive quarters of positive GAAP EPS in the second half of the year.

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To some degree, Reddit’s problems are the same ones facing all the tech companies that tend to rise more than the broader market but also fall faster during moments of turmoil. The Nasdaq 100 is in correction territory, down more than 10 per cent from a recent peak, and the biggest technology stocks are slumping as investors are finding few reasons to snap up risk assets at a discount. Even two back-to-back positive days for the Nasdaq 100 earlier this week weren’t enough to meaningfully boost confidence.

“These relief rallies are not an indication that things are great. They’re an indication that a lot of people don’t know what’s coming,” Francisco Bido, senior vice president and portfolio manager at F/M Investments, said of the broader market’s movements. “Unless I see this thing reverse in a really healthy investment environment, and a lot of clarity when it comes to the tariff situation and all that, then I’m not buying it yet.”

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At its February peak, Reddit’s stock had risen over 500 per cent from the US$34 initial public offering price last March. Some of the enthusiasm was due to a series of deals in which Reddit was paid to allow its content to be used for training artificial intelligence models. More recently, though, there have been questions about the long-term growth prospects for the artificial intelligence industry.

Reddit faces additional scrutiny because of its relatively short tenure on Wall Street. As the earliest investors have reached the end of their lockup periods, they’re free to unwind stakes. This could put further selling pressure on the stock, which is still up 200 per cent since the IPO.

On Wall Street, the average price target from analysts has fallen to about US$195 from US$207 a month ago. That still offers a roughly US$85 upside from where shares closed following Thursday’s eight per cent slump. Only three analysts recommend that investors sell, in comparison to the 15 with a buy rating and seven with a hold.

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In a note on March 20, Guggenheim analysts led by Michael Morris lowered their price target on the stock to US$170 from US$210 to reflect the contraction of multiples across the digital ad peer group. Still, Morris’s team reiterated their optimism.

“Our buy rating reflects our confidence that Reddit is in the early stages of executing on a robust, multi-year user and monetization growth opportunity,” Morris wrote, adding that he sees potential for user numbers to begin growing again in the first quarter of 2025, with even more opportunity ahead as the company expands in international markets. Morris also said that the domestic user challenges seen in the last quarter from the change in Google’s algorithm “largely abated.”

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Vince Lorusso, president and portfolio manager at Clough Capital Partners LP, is still bullish on the company. He may, though, look for opportunities to sell in the short term because of the uncertainty hanging over the markets.

“Along the way, if there’s going to be volatility and entry points or places to take some profits, we’ll look to do that,” he said.

—With assistance from David Watkins and Stephen Kirkland.

Bloomberg.com

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