Reddit's Legal Battle and the Zero-Click Crisis: A Threat to Shareholder Value?

The recent securities lawsuit filed against Reddit, Inc. (NYSE: RDDT) has thrown into sharp relief the growing risks companies face as tech giants like Google reshape the digital landscape with AI. At the heart of the litigation is a critical question: Can Reddit's management credibly claim that the rise of “zero-click” searches—where users find answers directly in Google's search results—has not materially harmed its user growth and revenue? The answer could determine whether investors' losses are recoverable and, more importantly, whether Reddit's future is clouded by reliance on a fading traffic model.

The Lawsuit's Core Allegations: Misleading Optimism

The class action complaint Tamraz v. Reddit, Inc. (filed June 18, 2025) alleges that Reddit misled investors from October 2024 to May 2025 by downplaying the impact of Google's AI Overviews. These features, which aggregate information from sources like Reddit to provide instant summaries, have driven a surge in zero-click searches. The lawsuit claims that Reddit's executives falsely assured investors that the trend was “no different from past algorithm changes” and posed “no long-term risk” to its traffic or ad revenue.

The data tells a different story. By May 2025, Reddit had reported its third consecutive quarter of slowing daily active user (DAU) growth—a key metric for ad revenue—and its stock price had plummeted 17.8% since January. Analysts at Wells Fargo and Baird, citing the permanent impact of zero-click searches, downgraded the stock in late May, triggering further declines. On May 21, Reddit's shares fell 9.3% to $95.85, erasing billions in market value.

The Zero-Click Crisis: Material Harm or Overblown Fears?

The lawsuit hinges on proving that Google's AI changes caused material harm to Reddit's business. Here, the evidence is compelling. Zero-click searches now account for nearly 27% of Google queries in the U.S., and platforms like Reddit are bearing the brunt. A niche website operator cited in the complaint reported a 90% drop in search traffic starting February 2025, directly tied to algorithmic shifts. For Reddit, which relies heavily on logged-out users (who generate less ad revenue), the loss of organic traffic is existential.

Critically, the lawsuit argues that Reddit's claims about “stable user intent” were misleading. While searches for the term “Reddit” increased, the rise reflected users seeking answers via Google's summaries, not visits to the site itself. This disconnect between search volume and actual traffic undermines Reddit's growth narrative.

The Validity of Disclosures: A Reasonable Basis?

For investors, the linchpin is whether Reddit's optimistic guidance had a “reasonable basis” under securities law. The complaint alleges it did not. Internal documents reportedly show executives were aware of the zero-click trend's severity but continued to tout user growth as “robust.” This raises red flags: If Google's AI Overviews are permanently diverting users away from Reddit, the company's financial forecasts—such as its Q1 2025 revenue surge to $392 million—may lack a sustainable foundation.

Reddit's defense, if any, is unclear. The lawsuit emphasizes that the company's revenue growth relied on new AI ad tools and efforts to convert logged-out users—a strategy that may falter as Google's dominance grows. With over 60% of Reddit's traffic originating from Google searches, the platform is uniquely vulnerable to algorithmic whims.

Investment Implications: A Risky Bet on Adaptation

What does this mean for investors? The lawsuit's success could force Reddit to pay damages, but the bigger risk lies in its ability to adapt. The company's Q1 results, while strong, mask structural challenges. Even if it wins the lawsuit, Reddit must address its reliance on Google traffic—a model now under siege.

Mitigation strategies, like diversifying traffic sources (e.g., Pinterest-style discovery features), are mentioned in the complaint but underdeveloped in practice. Meanwhile, competitors like Quora—favored in Google's AI summaries—may siphon user attention.

Final Analysis: Proceed With Caution

Reddit's stock trades near $100—a far cry from its 2021 peak—and faces dual threats: litigation risk and a fading business model. While the company's AI ad tools show promise, they're insufficient to counteract Google's zero-click trend. Investors should consider:
1. Lawsuit Timeline: The lead plaintiff deadline is August 18, 2025. A strong lead plaintiff (e.g., a large fund) could pressure Reddit to settle, depressing shares.
2. Traffic Diversification: Until Reddit proves it can reduce reliance on Google, its growth is speculative.
3. Valuation: At a forward P/E of ~30 (based on 2025 estimates), the stock demands flawless execution—a high bar given the headwinds.

Recommendation: Hold or sell unless Reddit demonstrates a credible plan to thrive in a zero-click world. The risks here are material, and the legal battle underscores a broader truth: In the AI era, companies that depend on third-party platforms for traffic are playing a high-stakes game of regulatory and algorithmic roulette.

For now, Reddit's future hinges on its ability to innovate faster than Google's AI—and its lawyers can defend its disclosures. Neither looks assured.