Reddit Stock Plunges 30% Post Q3 Earnings: Buy, Sell, or Hold?

Reddit (RDDT) reported third-quarter earnings that initially seemed impressive: revenue surged 54% year-over-year, driven by a robust advertising portfolio, and daily active users (DAUs) grew 12%. The company also highlighted increased adoption of its AI-powered tools, which many hoped would diversify revenue streams.

However, the market focused on a less rosy detail: a significant decline in search traffic. Management noted that changes in Google's search algorithms, including the rise of AI Overviews, have reduced the volume of visitors arriving at Reddit from search engines. This is critical because a large portion of Reddit's logged-out users come from search, and those users are a key source of ad impressions.

Additionally, costs are rising as Reddit invests in AI and infrastructure, which pressured margins. The stock, already down 60% year-to-date before earnings, plunged another 30% following the report, reflecting deep investor disappointment.

The selloff also comes amid a broader rotation away from high-multiple tech stocks. Reddit's price-to-sales ratio of 4.03x, while down from its peak, still looks stretched compared to some peers, especially given the uncertain growth outlook.

Overall, the earnings report painted a mixed picture: strong top-line growth but concerning trends in user acquisition and profitability. The market chose to focus on the negatives, sending the stock sharply lower.

The decline in search traffic is a red flag for Reddit's growth story. A significant portion of Reddit's value proposition to advertisers is its ability to attract a large, engaged audience. If search engines are sending fewer users, that could limit ad inventory growth and reduce the platform's appeal to advertisers.

Moreover, competition from AI-powered search results (like Google's AI Overviews) and other social platforms is intensifying. Reddit's unique content is valuable, but if users can get answers directly from AI without clicking through to Reddit, engagement could suffer.

On the positive side, Reddit's advertising business is growing faster than the overall digital ad market, and the company is investing in AI to improve content recommendations and ad targeting. These investments could pay off in the long term, but they are weighing on near-term profitability.

Investors must weigh the potential for Reddit to monetize its vast user base against the risks of declining search referrals and rising costs. The stock's sharp decline reflects a reset in expectations, but it also raises the question of whether the selloff is overdone.

Compared to peers like Meta and Google, Reddit is still a small player in digital advertising, but its niche communities offer a unique value proposition. The key question is whether Reddit can diversify its traffic sources and reduce dependence on search.