Shares of Reddit (RDDT -12.38%) are tumbling on Monday. The stock lost 12.3% as of 1:25 p.m. ET and was down as much as 12.4% earlier in the day. The drop comes as the S&P 500 (^GSPC -0.96%) fell 1.2% and the Nasdaq Composite (^IXIC -1.52%) lost 1.4%.
The social media platform received pretty dim coverage from Wall Street analysts.
Reddit’s growth may be less impressive than it first appears
Redburn Atlantic analysts James Cordwell and Joseph Barker initiated coverage of Reddit with a “sell” recommendation. The pair set the lowest price target thus far: $75. While Reddit has seen impressive user growth, the Redburn analysts have doubts on its sustainability, calling it a “gift” from Alphabet‘s Google.
Google made some changes to its algorithm that led to Reddit nearly doubling its size in the past 18 months. However, the analysts argue that most of this growth is from users looking to answer a specific question and don’t convert to logged-in users, who are ultimately much more valuable.
The analysts believe the user growth seen in the past won’t continue at the same pace, saying, “There is clear evidence that the boost to traffic and visibility from these changes is hitting a ceiling,” adding that “what Google giveth, it will taketh away.”
Advertising challenges ahead
Cordwell and Barker lay out a compelling case. The user growth that has excited investors looks to be misguided, given the nature of the users driving that traffic. Additionally, Reddit is a different kind of social media platform than the Instagrams and TikToks of the world.
I have doubts on how effective advertising will prove over time compared to Reddit’s peers. As a primarily text-driven platform, it just isn’t as impactful, in my view.
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.
