Reddit's Existential Crisis: Can It Outrun Google's AI and Its Own Legal Woes?

The intersection of legal battles, AI disruption, and overvalued tech stocks is rarely as combustible as in the case of Reddit, Inc. (NYSE: RDDT). A securities fraud lawsuit filed in June 2025 has thrown the social media giant into the spotlight, exposing its vulnerabilities to Google's AI-driven search algorithms and the consequences of misleading investors. This article dissects the material impact of these forces on Reddit's user base, financial health, and stock valuation—and what investors must do to mitigate losses.

The Legal Storm: Misleading Claims Meet AI Reality

The lawsuit, Tamraz, Jr. v. Reddit, Inc., alleges Reddit executives obscured a 55% plunge in organic search traffic from Google between 2022 and 2025. This decline, driven by Google's AI tools like “AI Overview,” which summarize content directly in search results, has starved Reddit of inbound traffic. Instead of transparently addressing this, the company reportedly assured investors of “robust user growth,” even as logged-out users (50% of traffic) generated only 15% of ad revenue—a critical flaw in its monetization model.

By May 1, 2025, the truth began to unravel. Reddit admitted slowing user growth, triggering a 4% stock drop to $113.83. A month later, analyst downgrades (Baird and Wells Fargo cited Google's AI impact) sent shares spiraling another 9% to $95.85.

The Financial Toll: A High-Flying Valuation on Shaky Grounds

Reddit's 2024 revenue soared 62% to $1.3 billion, but net losses widened to $484 million—a stark reminder of its reliance on growth over profitability. At a $21.6 billion valuation (June 2025), Reddit trades at a P/E of 182x and EV/EBITDA of 727x, levels that demand flawless execution.

Analysts now project further user losses—up to 30% by 2026—as Google's AI continues to siphon traffic. If realized, this could collapse Reddit's valuation. Already, the stock trades at a 25% discount to its $147.71 Wall Street target, signaling investor skepticism.

Strategic Gambits: Can “Reddit Answers” Save the Day?

In response, Reddit is rolling out tools like “Reddit Answers,” designed to compete with Google's AI by offering curated community content directly in search results. A $60 million partnership with Google (terms undisclosed) may also play a role, though its strategic value remains unclear.

However, these moves face steep hurdles. Google's AI dominance is entrenched, and Reddit's cash reserves ($2.2 billion) provide a buffer but no guarantee of survival.

The Legal Cost: A $100 Million Gamble?

The lawsuit adds another layer of risk. If settled, Reddit could pay over $100 million—a manageable sum given its cash, but a blow to credibility. Investors seeking redress must act by August 18, 2025, to join the class action via law firms like Bleichmar Fonti & Auld LLP (notable for a $900M Tesla recovery) or Kessler Topaz (with $2.7B in settlements).

Investment Playbook: Hold, Sell, or Hedge?

1. Hold (for long-term believers): Only consider if you trust Reddit's ability to scale “Reddit Answers” and stabilize traffic. Monitor adoption rates and partnerships closely.
2. Sell (if risk-averse): With a P/E of 182x, the stock is priced for perfection. A settlement or further user loss could trigger a valuation reset.
3. Hedge (to limit downside): Use put options on RDDT or inverse ETFs like PROX (which bets against tech stocks) to offset losses.

Conclusion: A Test of Transparency and Innovation

Reddit's future hinges on two variables: resolving the lawsuit and proving its adaptability to AI-driven competition. Investors face a high-risk, high-reward scenario. While the stock's current price reflects deep pessimism, the path to recovery requires not just technological wins but also hard-won trust from the market. For now, the jury—and the jury of investors—is still out.

Final Recommendation: Hold only if you're a Reddit loyalist. For everyone else, proceed with caution—or sit on the sidelines until the legal and AI wars clarify.