Why Reddit Stock Is Plummeting This Week

Key Points

• Reddit stock has fallen double digits since last week's market close.

• A report from MIT has raised concerns about the effectiveness of generative AI for businesses.

• Investors are also worried about the outlook on inflation.

• 10 stocks we like better than Reddit ›

Reddit (NYSE: RDDT) stock has gotten hit with a big pullback in this week's trading. Ahead of the market's open this Friday, the company's share price had fallen 11.3% from its level at the previous week's market close. Over the same stretch, the S&P 500 was down 1.2%, and the Nasdaq Composite was down 2.4%.

Reddit and other tech stocks have gotten hit with big pullbacks amid an uptick in concerns that valuations for artificial intelligence (AI) stocks could be in a bubble. The company's share price has also been under pressure due to bearish inflation indicators.

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Image source: Getty Images.

New AI research from MIT has hurt Reddit stock

On Tuesday, the Massachusetts Institute of Technology (MIT) published research that resulted in significant selling pressures for AI stocks. According to the new study published by the famous tech-research university, 95% of companies that have invested in integrating generative AI into their business operations have yet to see any profitability gains.

The research raised concerns that valuations for AI stocks could be in a bubble, and it was a significant factor in pullbacks for many companies with exposure to the artificial intelligence market this week. Reddit stock is still up 107% over the last three months, and sales momentum connected to the company's licensing of data for AI models has been a driving factor in the rally.

Inflation concerns are back in focus

After the Bureau of Labor Statistics published July Producer Price Index data last week that showed levels of inflation that were much hotter than expected, some investors started bracing for the possibility that higher inflation would start showing up in the consumer side of the economy. Worrying indicators along those lines showed up in second-quarter earnings reports from Home Depot and Target this week.

Home Depot said that it will be raising some prices due to tariffs, and Target said that it was also seeing pricing pressures and weak consumer spending due to tariffs. If consumer-facing inflation starts accelerating, the Federal Reserve may be wary about delivering substantial cuts for interest rates. Such developments could put significant dents in valuations for Reddit and other growth stocks.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Target. The Motley Fool has a disclosure policy.