Well Fargo Downgrades Reddit to Hold, Citing Google AI Search Threat

Well Fargo, a prominent financial institution, has downgraded its rating for Reddit (RDDT.US) from "buy" to "hold," citing concerns over the potential impact of Google's accelerated development of AI search functionalities. The bank believes that shifts in search traffic trends could negatively affect Reddit's user base and financial performance. This downgrade comes as user behaviors are rapidly evolving, with changes in search habits potentially leading to more sustained user loss.

The bank's report highlights that Reddit's valuation multiples are expected to remain under pressure due to these factors. The bank anticipates that Reddit will face challenges in growing its logged-in user base and high-margin data licensing revenue due to changing search trends. Additionally, the bank expresses skepticism about Reddit's ability to meet market expectations for growth in advertising revenue from logged-in users.

Well Fargo has also lowered its target price for Reddit from $168 to $125. The bank's report emphasizes that the search behavior is currently in a phase of rapid change, and platforms like Reddit, which rely on search-recommended traffic, must navigate this challenging period. The bank predicts that non-logged-in users will face more sustained pressure, ultimately impacting the process of acquiring logged-in users and the long-term growth potential of the advertising business.

As Google becomes more proactive in driving its AI search transformation, Well Fargo believes that the uncertainty facing Reddit is increasing. The bank's report underscores the need for Reddit to adapt to these changes to mitigate the potential negative impacts on its financial performance and user base. The downgrade reflects the bank's cautious outlook on Reddit's prospects in the face of evolving search trends and the increasing competition from AI-driven search functionalities.