Reddit's Crossroads: Can It Navigate Google's AI Threat and Legal Headwinds?

The recent securities class action lawsuit against Reddit (NASDAQ: RDDT) has thrust the platform into the spotlight, revealing vulnerabilities in its business model and governance. At the heart of the matter: Google's AI-driven search changes are eroding Reddit's traffic—a critical lifeline for its ad-driven revenue engine. This article dissects the financial stakes of the lawsuit, the existential threat posed by Google's AI, and whether Reddit's strategies can secure its long-term viability.

The Lawsuit: A Betrayal of Trust or a Market Surprise?

The lawsuit, Tamraz, Jr. v. Reddit, Inc., accuses the company of misleading investors by downplaying the impact of Google's AI Overviews. These features, which provide instant answers in search results, have slashed Reddit's organic traffic by 55% since 2022, according to plaintiffs. Despite this, Reddit executives allegedly assured investors of “robust growth” and “no revenue impact” during earnings calls in late 2024.

The problem? Analysts had already warned that Google's AI shift was permanent, not a temporary blip. Logged-out users—half of Reddit's traffic—generate just 15% of ad revenue, making traffic declines a double whammy: fewer users mean fewer ads served, and fewer engaged users mean lower ad prices.

The legal risks are stark: if proven, the misstatements could cost Reddit up to $100 million in settlements. But the real threat lies in the market's loss of confidence. Investors now question whether Reddit's leadership can navigate a shifting digital landscape—or if they're merely papering over cracks.

The Operational Crisis: When Traffic Is the Lifeblood

Reddit's business model hinges on two metrics: Daily Active Users (DAUs) and Average Revenue Per Unique (ARPU). Both are now under siege.

Google's AI Overviews have turned “zero-click searches” into a tidal wave. Users no longer need to visit Reddit to find answers, eroding the platform's role as a repository for niche communities and viral content. The lawsuit alleges this caused a 30% drop in ad revenue in 2024 alone. Analysts project further declines, with 30% total traffic loss by 2026 if Google maintains its AI dominance.

Reddit's response? A $60 million partnership with Google to integrate its content into search results—a move critics call “kissing the hand that bites you.” Meanwhile, its own “Reddit Answers” tool, designed to compete with AI summaries, faces an uphill battle against Google's entrenched algorithmic might.

Financials: Growth vs. Reality

Reddit's 2024 revenue grew 62% to $1.3 billion, but net losses swelled to $484 million. Its valuation of $21.6 billion in June 2025 sits on shaky ground: its EV/EBITDA of 727x and P/E ratio of 182x demand flawless execution in a hostile environment.

The numbers tell a stark story:
- User Growth: Slowed to a crawl in Q1 2025, triggering a 4% stock drop in May.
- Analyst Downgrades: Wells Fargo and Baird cut ratings after Reddit's Q1 report, sending shares down another 9% to $95.85—a far cry from its 2023 peak of $160.

The lawsuit's timing is brutal. Investors are now demanding clarity on whether Reddit's “growth” is real or a mirage fueled by unsustainable metrics.

Investor Implications: Hedge, Hold, or Exit?

For investors, Reddit is a high-risk, high-reward proposition. Its valuation is a bet on its ability to adapt to AI-driven competition—a bet that's looking riskier by the day.

Short-Term Concerns:
- The class action's August 18, 2025 deadline for joining the lawsuit creates uncertainty. Settlement costs could strain Reddit's $2.2 billion cash reserves, though not catastrophically.
- Legal outcomes will influence investor sentiment. A loss could trigger further downgrades and a valuation reset.

Long-Term Risks:
- Third-Party Dependency: Reddit's fate is tied to Google's algorithmic whims—a risk investors must weigh against its content ecosystem's value.
- Ad Revenue Model: With half its traffic unengaged, Reddit's ad revenue is structurally vulnerable. Competitors like TikTok or AI-driven platforms could chip away at its remaining优势.

Investment Strategies:
1. Hedge with Put Options: Investors holding RDDT should consider protective puts to limit downside risk.
2. Monitor Traffic Metrics: Track DAU growth and ARPU trends post-Q3 2025. A sustained rebound could justify the high multiples.
3. Avoid Overexposure: Reddit's valuation leaves little room for error. Small, speculative positions may be prudent.

The Bigger Picture: A New Era of AI Litigation

Reddit's case reflects a broader shift in corporate accountability. Investors are no longer tolerating companies that downplay risks from AI-driven disruptions. This lawsuit isn't just about Reddit—it's a warning to firms reliant on third-party ecosystems (e.g., Google's search, Meta's ads) to disclose vulnerabilities or face legal fallout.

Conclusion: Can Reddit Adapt in Time?

Reddit's survival hinges on two factors: winning back traffic by outmaneuvering Google's AI and convincing investors it's worth its sky-high valuation. The lawsuit underscores a painful truth: in the AI era, companies can't afford to be blindsided by competitors' innovations—or caught lying about them.

For now, the stock's 25% discount to Wall Street targets suggests the market is skeptical. Investors must ask: Is Reddit a pioneer in reimagining online communities, or a relic of a pre-AI era? The answer—and the stock's fate—will be written in the next 12 months.

Final Note: Monitor Reddit's Q3 2025 earnings and the lawsuit's progress closely. Hedging is advisable unless traffic trends stabilize.