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(Bloomberg) — The user growth experienced by Reddit Inc. is a “gift” from Alphabet Inc.’s Google that may have led to excessive bullishness on the social-media company, according to analysts who have become the stock’s biggest bear.
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Redburn Atlantic’s James Cordwell and Joseph Barker initiated coverage of Reddit with a sell recommendation, saying that while the financial performance since its initial public offering has been “stellar,” Wall Street is not appreciating the vulnerability of its growth to Google Search. Additionally, the analysts see user growth stalling in 2025.
“The reality, in our view, is that Reddit’s potential, breadth of appeal and thus value as a company are being overstated,” Cordwell and Barker wrote in a note published on Monday.
Shares fell 2% on Monday and is down 23% this year. It now has 15 buy-equivalent recommendations, seven holds and three sells among analysts tracking the stock, according to data compiled by Bloomberg. Cordwell and Barker’s price target of $75 is the lowest.
Cordwell and Barker said Reddit’s prospects changed in mid-2023, with the platform nearly doubling in size over the following 18 months. However, they believe this growth has been “misconstrued” as an indicator of its potential and they instead attribute it to Google’s algorithm working in the platform’s favor, with logged-out users as the main driver.
“Accelerated user growth has been driven predominantly by logged-out users who arrive on the platform largely via Google Search,” Cordwell and Barker wrote. “These users are much less valuable to Reddit as they are typically just looking for an answer to a query and thus spend little time on the platform.”
The analysts note the pace of logged-in user growth has been largely unchanged, which provides strong evidence of there being “little structural change” in Reddit’s appeal. Cracks are starting to appear in these Google-fueled gains.
“There is clear evidence that the boost to traffic and visibility from these changes is hitting a ceiling, with a risk that what Google giveth, it will taketh away,” Cordwell and Barker said, noting that there is risk the algorithm changes that have benefited Reddit could start working against it.
Reddit’s fourth-quarter results already provided a sign of this. The shares slumped last month as the company’s user growth slowed, which it attributed to changes in Google’s algorithm. Over the past few years, Google had accounted for as much as 50% of Reddit’s traffic in a single day.