Why Reddit Stock Was Falling This Week: Navigating Volatility in the AI-Driven Social Media Landscape

The week of May 15–22, 2025, saw Reddit’s stock (NYSE: RDDT) plummet by over 11%, driven by a perfect storm of analyst downgrades, macroeconomic fears, and existential threats from Google’s AI advancements. Yet beneath the short-term turbulence lies a company with a compelling growth story and structural advantages that could position it for long-term dominance in the AI-powered social media era. For investors willing to look past the noise, this volatility creates a rare buying opportunity.

The Short-Term Sell-Off: Downgrades and Disruption

The decline began on May 15, when Wells Fargo downgraded Reddit to “Equal Weight” from “Overweight,” slashing its price target to $115 from $168. Analyst Ken Gawrelski argued that Google’s AI-powered search tools were permanently disrupting Reddit’s traffic, particularly from “logged-out” users—55% of its user base but only 15% of ad revenue. This downgrade triggered an immediate 5% drop, pulling the stock to $108.

By May 17, broader market fears compounded the pain. Rising Treasury yields and recession concerns sent growth stocks reeling, with Reddit falling a further 9.3% in a single day. The sell-off reflected not just Reddit’s struggles but a broader skepticism toward high-growth tech companies in a slowing economy.

The Long-Term Case for Reddit: Fundamentals and AI Resilience

While the near-term risks are real, Reddit’s underlying fundamentals remain robust:

1. Revenue Growth:
2. Reddit reported 64.1% YoY revenue growth in Q1 2025, driven by a 61% surge in ad revenue to $358.6 million.
3. International expansion is booming, with non-U.S. revenue up 82% YoY, underscoring untapped global potential.

1. User Metrics:

2. Daily Active Users (DAUs) grew by 6.4 million in Q1, reaching 218 million. This reflects Reddit’s ability to retain its core community while attracting new audiences.

3. AI-Driven Innovation:

4. Reddit Answers: The company’s AI-powered search tool, launched in Q1, directly counters Google’s threat by enabling users to find niche content faster. Early metrics show strong engagement, with adoption rates exceeding expectations.

5. Content Monetization: Reddit’s unique “corpus” of user-generated content is a moat against AI chatbots, which lack the authenticity of human-driven discussions.

6. Analyst Consensus:

7. Despite the downgrade, 10 of 15 analysts still rate Reddit a “Buy”, with an average price target of $150.35—a 47% upside from recent lows. Bulls emphasize Reddit’s $60 million annual data licensing deal with Google (which, while controversial, provides a high-margin revenue stream) and its potential to monetize AI-generated insights.

Why the Google Threat Isn’t Terminal

While Google’s AI tools are a near-term headwind, Reddit’s model is uniquely resilient:

• Community vs. AI: Users seek Reddit for authentic, human-driven advice, not algorithmic summaries. This “trust premium” makes Reddit sticky, even as Google’s AI encroaches on traffic.
• Data Licensing Nuance: The $60 million deal provides Google with data to refine its AI, but Reddit retains control over its content. Over time, this could evolve into a strategic partnership, not a zero-sum game.

The Contrarian Play: Buy the Dip, Own the Future

Reddit’s stock now trades at a P/E of 163, down sharply from its 52-week high but still premium to peers like Meta (P/E 30). This valuation reflects skepticism about its growth trajectory—but also leaves room for upside if Reddit delivers on its AI roadmap and user retention.

Investors should focus on three catalysts:
1. Reddit Answers Adoption: Scaling this tool could stabilize ad revenue and even attract new users.
2. International Expansion: Markets like India and Southeast Asia offer low-penetration growth opportunities.
3. Earnings Guidance: A Q2 report showing DAU stability or ad revenue resilience could reverse the downgrade narrative.

Final Call: This Is a Buy Signal

Reddit’s recent decline is a function of short-term fears, not a death knell. With a “GOOD” financial health score (2.84/5), strong cash flow, and a product pipeline that addresses its biggest threats, this is a company primed to rebound. The Wells Fargo downgrade may have been justified in the near term, but the broader market overreacted.

For investors with a 3–5 year horizon, Reddit’s current dip offers a chance to buy a $150+ stock at $108—a 29% discount to consensus targets. The risks are clear, but the reward is even clearer. Act now before the narrative shifts.

Note: Past performance does not guarantee future results. Always conduct your own research and consult a financial advisor.