Google recently made changes to Search, particularly AI Overviews and AI-driven search, which could weaken the flow of users from Google to Reddit.
- RDDT stock joined the S&P 500 on Tuesday.
- The bump from the inclusion news, issued on Aug. 14, faded subsequently, and Reddit shares declined over Monday and Tuesday, cumulatively shedding over 11%.
- Stocktwits sentiment for RDDT was ‘bullish.’
Reddit shares dipped 0.5% on Tuesday, extending their recent decline even after the stock was added to the S&P 500. The company faces pressure from changes to Google’s search framework that appear to be reducing traffic from the search engine, prompting a more cautious view on the stock among analysts.
The S&P announced on Aug. 14 that Reddit would be added to its benchmark index, with the inclusion taking effect Tuesday. Such additions typically drive institutional demand for a stock, with J.P. Morgan analysts estimating at the time that index funds would need to buy about 16.7 million Reddit shares.
The bump from the news faded subsequently and Reddit shares declined over Monday and Tuesday, cumulatively shedding over 11%.
Reddit’s Search Traffic Problem
Google has made changes to its Search, particularly AI Overviews and AI-driven search, which risks weakening the flow of users from Google to Reddit.
Instead of clicking through traditional “blue links,” users can now get answers directly in Google’s AI-generated summaries, potentially reducing referrals to Reddit even when its posts are used as sources.
In its earnings report on July 30, Reddit said the search traffic had become “choppy” in the second quarter, raising concerns that slower user growth could follow and making the company more dependent on direct visits, its app and other channels.
Analysts’ View On RDDT
Currently, 21 of 33 analysts rate RDDT a ‘Buy,’ 11 a ‘Hold,’ and one a ‘Sell,’ per Koyfin data. Their average price target of $215.47 implies a 36% upside from the stock’s closing price on Tuesday.
Earlier in the week, Raymond James raised its price target on RDDT to $205 from $200, while keeping a ‘Strong Buy’ rating.
Reddit’s outlook is mixed, with U.S. DAUs expected to remain below Street estimates amid AI Overviews headwinds, while improvements to Feed recommendation systems and eventual AI Chatbot traffic could drive stronger conversion, the research firm said in its note.
Retail View On RDDT
On Stocktwits, the retail sentiment for RDDT climbed over the past week and was ‘bullish’ on Wednesday.
“$RDDT rinse repeat. Getting close to buy level again. Trade the shot out of channel until breakdown or breakout,” said a trader.
“Reddit’s share of ChatGPT Search citations fell from an average 3.8% between July 18 and Aug. 7 to just 0.5% from Aug. 14-17, an ~86% drop,” another trader wrote, citing data from Promptwatch. “Back in April, $RDDT was the single most-cited domain in ChatGPT Search, accounting for 4.14% of citations.”
Year to date, RDDT stock has declined over 31%.
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