Reddit Stock (RDDT) Dropped Double Digits, But Why The Shift In Sentiment?

Reddit's stock (NYSE:RDDT) experienced a sharp decline, shedding 11.91% in yesterday's trading session, intensifying concerns about the platform's growth prospects. This downturn positions the stock a significant 28% below its recent highs, prompting market observers to dissect the underlying causes of this sudden shift in sentiment.

The stock's recent performance reflects a confluence of negative factors impacting market confidence. A key contributor to the downward pressure appears to be declining daily active users (DAUs). Recent data from SimilarWeb indicates a concerning trend of decreasing DAUs over the past 30 days. RBC Capital has taken note of this development, maintaining a Sector Perform rating with a price target of $245, while acknowledging the potential risks associated with reduced user engagement.

Adding to the woes, Reddit's role as a primary data source for AI models, particularly OpenAI's ChatGPT, seems to be diminishing. Data from Promptwatch reveals a dramatic drop in ChatGPT's citations of Reddit content, plummeting from 14% in September to under 2% by October 1st.

This sharp reduction suggests a strategic shift by OpenAI towards more curated datasets, potentially marginalizing Reddit's influence in the AI landscape. The implications of this shift are significant, as Reddit has previously leveraged its wealth of user-generated content to attract partnerships and revenue opportunities in the AI space.

Further complicating the picture, Reddit's vulnerability to external platform changes has been highlighted by past experiences with Google's search algorithm. In February, changes in Google's algorithm negatively impacted Reddit's visibility in search results, leading to a shortfall in daily active unique visitors. Although traffic from Google searches has since rebounded, the incident underscores the platform's dependence on external technologies and the potential for future disruptions.

Analyst sentiment has also turned increasingly bearish. Redburn Atlantic initiated coverage of Reddit with a “Sell” rating and a 12-month target price of $75 in March 2025, implying a potential 40% decline from current levels. Their analysis pointed to concerns that Reddit's user growth, heavily reliant on Google, may stagnate by 2025, leading to an overvaluation of the company.

While Reddit continues to explore avenues for growth and monetization, the combination of declining user engagement, reduced AI reliance, and negative analyst sentiment has created a challenging environment for the stock. The market is clearly reassessing Reddit's long-term growth potential in light of these developments.

The convergence of these factors – decreased user engagement, declining ChatGPT citations, vulnerability to algorithm changes, and analyst downgrades – has collectively fueled the recent sell-off in Reddit's stock, leaving markets to ponder the platform's path forward.