Google's 'Curveball' of Reddit Traffic Offers Investors a Buying Opportunity

A sharp decline in Reddit Inc.'s stock following its unexpected user-growth miss in the fourth quarter may present an attractive opportunity for investors, according to Raymond James analysts.

‍

Stock Performance and Cause of the Decline

Reddit’s stock fell 8.8% as of 9:34 a.m. Eastern time, marking one of its steepest declines since March 28, 2024, when it dropped 14.6%, according to Dow Jones Market Data. The selloff came after the company attributed its weaker-than-expected user growth to "volatility" in Google search traffic, caused by an algorithmic change.

‍

Despite the negative reaction from investors, Raymond James analyst Josh Beck believes this situation presents a buying opportunity. He noted that Google's algorithm updates likely played a role in the lower-than-expected number of daily active unique users in the U.S.. Additionally, late-quarter ad spending was constrained, limiting Reddit’s revenue growth to a 5% beat of consensus estimates, lower than Raymond James’s projection of 9.5%.

‍

Recovery and International Growth

Although the fourth-quarter report fell short of expectations, Beck pointed to positive developments regarding daily active unique user recovery. He cited Reddit’s management commentary, which suggested that user growth had rebounded, likely due to the following factors:

• Google’s increased crawling of Reddit content, leading to more visibility in search results
• Uncollapsed comments appearing in search, improving engagement
• Spam-reduction algorithm updates, which may have enhanced the platform's quality

‍

“While the report did not clear our anticipated bar, we walk away encouraged by international upside,” Beck wrote in his note.

‍

Reddit’s international daily active unique users surged 46% in the fourth quarter, reaching 53.7 million. This outpaced the 32% growth in the U.S., where daily active unique users climbed to 48 million.

‍

Reddit defines a daily active unique user as someone identified by a unique identifier who either visits a Reddit page or opens the Reddit app at least once within 24 hours.

‍

Advertising Progress and Reddit Answers

Beck also highlighted Reddit’s advancements in advertising, as well as the strong early response to Reddit Answers, a feature that aims to enhance the platform’s searchability. He believes these elements could further boost engagement and monetization. Raymond James maintained its strong buy rating on Reddit’s stock.

‍

In December 2024, Reddit expanded the beta test of Reddit Answers, which leverages artificial intelligence to improve search functionality and help users find relevant content more efficiently.

‍

During a conference call discussing Reddit’s performance, CEO Steve Huffman noted that while Reddit Answers is still in its early stages, it has already proven useful for a variety of topics.

‍

“People have turned to it for everything from local updates on the LA wildfires to opinions on the best coffee makers,” Huffman said. “Reddit excels at providing insightful responses to subjective questions that are difficult to answer elsewhere.”

‍

Currently, Reddit Answers is only available in English, but Huffman expressed optimism about its potential. “We’re excited about how people are using it and the early promise of this product,” he added.

‍

Despite the recent stock dip, Reddit’s shares have soared 291.4% since its initial public offering (IPO) in March 2024. This significant gain reflects strong investor confidence in the company’s long-term growth potential, particularly in areas such as advertising, AI-driven search features, and international expansion.

‍