Reddit's Growth Hurdles: Legal Risks and Analyst Warnings Signal Caution for Investors

Reddit, Inc. (NASDAQ: RDDT) has long been a poster child for the shift toward decentralized, community-driven content. Yet beneath its recent financial headlines—boasting 108 million daily active users (DAU) in Q1 2025—critical cracks are emerging. A confluence of slowing growth, regulatory scrutiny, and escalating legal risks has turned what was once a narrative of unbridled expansion into one of investor caution. For those considering Reddit as an investment, these red flags demand serious scrutiny.

The Growth Paradox: Rising Users, Slowing Momentum

Reddit's Q1 2025 results revealed a 31% year-over-year increase in DAU to 108 million, driven by international markets like Brazil (up 79% in DAU). Yet this growth comes with caveats. Analysts note that the rate of expansion has slowed: the 31% gain marks Reddit's third consecutive quarter of decelerating growth, down from a 50% surge in early 2023.

The problem? Structural vulnerabilities. While Reddit's user base expands, its reliance on Google's search traffic—a key driver for its 60% of non-logged-in users—has become a liability. Google's “zero-click” AI features, which summarize answers directly in search results, now account for 27% of U.S. queries. This has diverted users from clicking through to Reddit, even as search volume for “Reddit” rises.

The disconnect between search intent and actual traffic has not escaped scrutiny. In May 2025, analysts at Wells Fargo and Baird downgraded Reddit's stock, citing “existential risks” from Google's algorithm shifts. Their concerns were validated when Reddit's shares plummeted 9.3% on May 21, following its Q1 report, which revealed the third straight quarter of slowing growth.

Legal Battles: A Costly Distraction

The company's troubles extend beyond organic growth. Multiple class-action lawsuits filed between October 2024 and May 2025 accuse Reddit of securities fraud. Plaintiffs argue that executives misled investors about the severity of Google's impact, even as internal documents allegedly revealed concerns over traffic erosion.

Key allegations include:
1. Misleading Optimism: Despite declining growth, Reddit assured investors that Google's AI tools posed no long-term threat.
2. Stock Price Manipulation: The lawsuits claim that executives knew the zero-click trend would depress ad revenue but failed to disclose this, artificially inflating the stock.

The legal risks are material. If successful, these suits could force Reddit to pay damages, settle claims, or face heightened regulatory scrutiny. The clock is ticking: investors who bought Reddit shares between October 2024 and May 2025 have until August 18, 2025, to seek lead plaintiff status—a clear signal of the mounting pressure on the company.

The Bottom Line: Valuation and Viability

Reddit's stock trades near $100, down sharply from its 2021 peak. With a forward P/E ratio of ~30—a premium to peers like Meta or Snap—the market is pricing in growth that may no longer be sustainable.

Consider the risks:
- Google Dependency: 60% of Reddit's traffic flows through Google, making it vulnerable to algorithmic shifts beyond its control.
- Monetization Limits: Despite 61% revenue growth in Q1, 90% of revenue still comes from ads. International markets, while growing, lack the ad spend of the U.S.
- Legal Costs: Even a partial settlement could drain resources, diverting capital from product innovation or traffic diversification.

Investment Implications: Proceed with Caution

Reddit's story is no longer one of pure growth but of strategic fragility. Investors must weigh three critical factors:
1. Google's Shadow: Can Reddit reduce its reliance on third-party traffic? Its AI-powered ad tools and machine translation efforts are steps forward, but execution remains uncertain.
2. Legal Uncertainty: The August 18 deadline for lead plaintiff applications suggests the legal battle will intensify. Settlements could drag down the stock further.
3. Valuation Reality: At 30x forward earnings, Reddit demands flawless execution—a high bar given its external dependencies.

Recommendation: For now, investors should tread lightly. Reddit's stock remains exposed to both regulatory and competitive risks. Short-term traders might capitalize on volatility, but long-term holders face mounting headwinds. Wait for clearer signs of traffic diversification, legal resolution, or a meaningful shift in ad revenue mix before considering a position.

In the world of social media, where platforms rise and fall on algorithmic whims, Reddit's future hinges not just on its user count but on its ability to control its destiny—a challenge it has yet to prove it can meet.