Reddit (RDDT) Shares Drop 3.6% as Valuation Gaps and AI Underperformance Spur Investor Skepticism

Reddit (RDDT) shares dropped 3.6% on Tuesday, marking a 4.37% intraday slide to their lowest since August 2025. The decline underscores growing investor skepticism amid valuation debates and operational uncertainties, despite the stock’s recent surge earlier this year.

Analysts highlight a widening gap between Reddit’s current valuation and industry benchmarks. At $196.35, the stock trades below a calculated fair value of $222.38, suggesting potential upside if earnings forecasts materialize. However, its price-to-sales ratio of 22x—far above the sector average of 1.4x—raises concerns about overbidding for growth that may not meet expectations. This discrepancy reflects divergent views on the platform’s ability to monetize its user base and sustain rapid revenue expansion.

Recent underperformance of Reddit’s AI partnerships, particularly its collaboration with ChatGPT, has dampened investor enthusiasm. Initial optimism about AI-driven engagement and advertising revenue has waned as results fell short of projections. This has prompted downward revisions in earnings expectations and increased scrutiny over the company’s long-term profitability. Meanwhile, global expansion efforts face hurdles, including regulatory complexities and cultural adaptation challenges in key markets.

Operational risks persist as Reddit grapples with content moderation pressures. The community-driven model, while a strength, remains vulnerable to reputational damage from harmful content. Legal challenges further weigh on the stock, with ongoing class-action lawsuits alleging securities violations between October 2024 and May 2025. While specifics remain undisclosed, such litigation could incur financial and reputational costs, compounding investor caution.

Despite these headwinds, some investors remain optimistic. Institutional buyers have increased stakes, and bullish analysts cite Reddit’s unique position in the social media landscape. However, the recent 23% drop over 30 days has sparked debates about whether the decline represents a correction or a mispricing. CEO Steve Huffman’s sale of 14,000 shares, reducing his stake by 2.6%, has also fueled speculation about short-term strategic adjustments, though insiders caution against overinterpreting the move.

The stock’s trajectory now hinges on Reddit’s execution of its monetization strategy, AI integration, and ability to navigate regulatory and operational risks. While the undervaluation relative to analyst estimates offers a potential entry point, investors must weigh these opportunities against the platform’s high-risk profile and sector-specific volatility. For now, Reddit remains a case study in balancing ambitious growth narratives with the realities of scaling a community-driven business in a competitive market.