Reddit Stock Declines Nearly 20% After Earnings Report, Ending Six-Month Rally

Traffic Challenges and CEO Stock Sales Impact Share Prices / Photo by Jaque Silva/NurPhoto via Getty Images

Reddit's stock (RDDT) has experienced a significant decline of approximately 19% following the release of its latest earnings report, marking a stark contrast to the six-month rally that had seen its share price quadruple. The social media platform, which debuted on the public market nearly a year ago, reported its fiscal fourth-quarter earnings last week. Despite exceeding earnings per share estimates, the number of daily active users on Reddit decreased from the previous quarter. This decline was primarily attributed to a change in Google's Search algorithm, which negatively impacted traffic to the platform.

CEO Steve Huffman addressed analysts during a conference call last Wednesday, stating that traffic from Google Search had begun to recover in the first quarter and had "regained momentum." However, following the earnings announcement, Reddit's shares fell by 5% the next trading day and have continued their downward trend over the past week. The stock's 19% loss over the last five days marks the steepest decline within that timeframe since April 2024.

Further compounding these challenges, Huffman and his trust executed a stock sale on Tuesday amounting to approximately $70.5 million, representing the largest sale by the CEO to date. This sale dwarfed his previous largest transaction, which involved 1,400 shares worth $2.8 million on January 31, prior to February 18. Additionally, on Thursday, Reddit's shares experienced a further drop of 7.5% after the U.S. Federal Trade Commission initiated an inquiry into tech platforms regarding their policies that permit user bans for specific types of content. Reddit's policies can result in user bans for bullying, harassment, or posting sexually explicit and abusive content.

While the recent decline in Reddit's stock price has nearly erased its year-to-date gains, the stock remains up nearly 220% from six months ago. Investors have been encouraged by the platform's increasing advertising revenue and growing partnerships with major AI companies such as OpenAI, with whom Reddit licenses its user data to help train AI models.

Despite the stock's recent downturn, the majority of Wall Street analysts continue to uphold their Buy ratings on Reddit stock. JMP Securities analyst Andrew Boone highlighted the "very elevated buyside expectations" prior to the earnings report, indicating that many investors still hold a positive outlook for the company's future.