Why Reddit Stock Got Hammered on Wednesday

One of the more up-and-coming social media stocks in recent times, Reddit (NYSE: RDDT), went down quite a bit on Wednesday. Investors traded assertively out of the stock following an analyst's price-target cut, to the point where it closed the day more than 9% in the red. That was a far steeper fall than the S&P 500 index's 1.6% decline.

The threat of AI

That pundit was Baird's Colin Sebastian, and before market open he changed his Reddit fair-value assessment to $120 per share, well down from his previous $140. Despite the double-digit adjustment, he left his "neutral" recommendation on the shares unchanged.

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The analyst's move, according to reports, was largely due to concerns about artificial intelligence (AI) capabilities being harnessed by tech titans such as Alphabet. Not long ago, that company's core Google unit rolled out AI responses to standard search queries, and it plans to continue beefing up its AI enhancements.

To Sebastian, this is a threat to Reddit's user growth, as it can obviate the need for discussion with other users -- the bread and butter of Reddit's business -- in order to obtain an answer. Mitigating this to a degree, the pundit wrote, is a data-licensing agreement in place between Reddit and Google.

There's no substitute for the real thing

While that's a legitimate source of concern for Reddit investors, I don't feel it's quite a deal-breaker. We still have quite a distance to go before AI functionalities can even come close to mimicking genuine and organic human reactions, so Reddit's forum-style presentation should continue to be popular.

It should also keep attracting new users, adding to Reddit's base -- and providing a foundation for more double-digit percentage growth in fundamentals like revenue and profitability.

Should you invest $1,000 in Reddit right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.