Reddit (RDDT) shares have come under sustained selling pressure, falling from a July peak of $207 to around $143. The stock has lost roughly half its value from last year's high, with market capitalization shrinking from over $51 billion to $27.5 billion. The decline comes as multiple headwinds converge, and technical analysts are warning of further downside.
Traffic Decline Weighs on Sentiment
A key concern is the persistent drop in website visitors. According to SimilarWeb data, traffic fell 3.22% last month to 4.18 billion visits. The company has attributed some of the slowdown to its relationship with Google, which pays Reddit $60 million annually to license content for AI training. The Wall Street Journal recently reported that Reddit is reconsidering the arrangement because Google's AI-generated summaries are reducing click-throughs to Reddit's site. On the last earnings call, CEO Steve Huffman acknowledged that "search referrals were choppy in the quarter, and traffic was more volatile later in the quarter," though he emphasized that the commercial business remains strong.
Post-Index Inclusion Blues and Valuation Concerns
Reddit's addition to the S&P 500 earlier this year provided a temporary boost, but the stock has since followed the pattern of other recent inclusions like Robinhood, CoreWeave, and Nebius, where momentum fades after the event. Valuation has also become a sticking point. At its peak, Reddit's market cap exceeded $54 billion, and while it has since contracted, the forward price-to-earnings ratio of 18 still sits above the sector median of 13. Analysts have responded by trimming their targets: DA Davidson cut its target to $185 from $200, Morgan Stanley lowered its view to $210 from $240, and JPMorgan reduced its target to $185 from $200.
Fundamental Growth Remains Intact
Despite the negative sentiment, Reddit's underlying business continues to expand. Daily active users rose 18% year-over-year to 130.3 million, driving a 61% increase in revenue to $805 million. Advertising remains the largest revenue contributor, and gross margin reached an impressive 91.3%, with net income exceeding $253 million. The United States accounted for the bulk of revenue, while the international segment generated over $167 million. Analysts project annual revenue growth of 53% to $3.4 billion this year, followed by $4.46 billion next year.
Technical Picture Turns Bearish
The daily chart reveals a head-and-shoulders pattern, a classic bearish reversal formation. The stock is now testing the pattern's neckline and has fallen below both the 50-day Exponential Moving Average and the Supertrend indicator. Additionally, the MACD lines remain below the zero line, reinforcing negative momentum. If the pattern completes, the initial downside target is the psychological level of $100, representing a 31% decline from current levels. The path of least resistance appears to be lower, though investors should watch for any reversal above the neckline that could invalidate the setup.
This article is for informational purposes only and does not constitute financial advice.
