Reddit shares in free fall: Buyers avoid the risky course!

Reddit shares have lost over 50 percent of their value since February 2025. Despite the significant price drop, bargain hunters are avoiding the social media platform's shares. The decline is attributed to stagnant growth and difficult market conditions. Reddit is struggling to compete with major competitors like Meta and Alphabet, which dominate the digital advertising market and have larger user bases.

The annual balance sheet and the results from the fourth quarter of 2024 show that Reddit is growing, but cannot exploit its sales potential. Additionally, a change to Google's search algorithm has negatively impacted Reddit's US traffic. Analysts are observing that short interest on Reddit has increased, indicating increasing bets against the company.

Analyst ratings and market development

In the wake of these developments, Guggenheim analysts lowered the price target for Reddit from $210 to $170. Bob Lang, an options analyst, calls Reddit stock overvalued, citing its lack of earnings. The NASDAQ 100 is currently in correction mode, which is further increasing investor reluctance. Francisco Bido of F/M Investments expressed concern about the general market situation. Still, some analysts see long-term potential for Reddit, particularly in the international market. Michael Morris from Guggenheim spoke of a multi-year growth strategy for user numbers and monetization. Vince Lorusso of Clough Capital Partners LP remains optimistic but is cautious about the timing of entry. Overall, uncertainty about the future development of Reddit shares remains high.

Additionally, Reddit Inc. (RDDT) blames Google's search algorithm change for missing analyst estimates for user growth in the fourth quarter. Roth MKM analyst Rohit Kulkarni sees further challenges but maintains a “neutral” stance. His price target is $195, which does not suggest a significant increase from current levels. Reddit only saw its global daily active users (DAU) increase by less than the expected 39% to 101.7 million in the fourth quarter.

Kulkarni expects Reddit to aggressively reinvest for growth this year, potentially leading to a slowdown and pressure on margins in the second half of 2025. The forecast calls for the company's incremental margins to decline to approximately 50% in the future. Reddit currently doesn't pay a dividend, making the stock unattractive for income investors.

Furthermore, Reddit stock is currently trading at approximately 20 times and 65 times its forecast sales and EBITDA for 2025, well above the level of competitors. Kulkarni, therefore, recommends caution while buying RDDT shares after the earnings decline as the valuation is worrisome. To justify the current share price, sales would have had to be over $440 million; However, Reddit only reported $428 million for the fourth quarter. The company reported profit of 36 cents per share, beating consensus estimates of 25 cents per share. In addition, company management expects a decline in sales in the range of 360 to 370 million dollars for the current quarter; Analysts estimate $358 million.

Managing director Steve Huffman emphasizes that the company is focused on a best-in-class experience for finding community and trusted information and recently launched a new AI feature called Reddit Answers.