Why Reddit Stock Was Falling This Week

Shares of Reddit (NYSE: RDDT) were sliding this week in response to an analyst downgrade on the social media stock. It fell sharply in the broader sell-off on Wednesday in response to a weak Treasury auction and rising Treasury yields, perhaps reflecting a lack of confidence in the U.S. economy and recessionary fears.

According to S&P Global Market Intelligence, the stock was down 11.6% through Thursday at 2:10 p.m. ET.

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Reddit faces a new threat

The stock fell 5% on Monday in response to Wells Fargo's downgrade of Reddit stock from overweight to equal weight, with analyst Ken Gawrelski lowering its price target from $168 to $115.

The firm called out Alphabet's Google's artificial intelligence (AI) advances and new AI search capabilities, believing that will likely sap Reddit's user growth, especially from logged-out users, which Gawrelski believes Reddit will need to maintain its strong growth rate. Additionally, the analyst said its data licensing business is incompatible with the long-term growth of the business, as it will leverage Reddit's knowledge base elsewhere.

On Wednesday, the stock tumbled again in line with the broader sell-off, losing 9.3% as growth stocks like Reddit are especially sensitive to rising interest rates and broader threats to the economy.

What's next for Reddit?

The social media stock has delivered strong results in a little over a year since it went public, driving strong user growth and ad revenue growth, and its AI-based data licensing business still appears to have a bright future.

Reddit has a unique and massive "corpus" of content on a wide range of topics, and it's more than a search hub, as users go there to get advice or feedback from other people, which is different from using an AI chatbot.

The company will have to continue delivering strong growth and improve its profitability, but one downgrade shouldn't shake investor confidence in the business.

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Wells Fargo is an advertising partner of Motley Fool Money. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Wells Fargo. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.