On Feb 13, Reddit's shares dropped 13% in premarket trading after falling short of expectations for daily active unique visitors due to a change in Google's search algorithm. This adjustment affected the platform's visibility in Google search results. Analysts from Morgan Stanley suggested that the challenges in user growth caused by the algorithm change may continue to impact Reddit's stock in the short term.
During the fourth quarter, Reddit faced some search volatility related to Google's algorithm change, as mentioned by CEO Steve Huffman in a letter to shareholders. However, traffic from the search engine has started to recover in the first quarter.
Piper Sandler analysts described the situation as an aberration. Despite reporting a 39% increase in daily active unique visitors to 101.7 million in the fourth quarter, Reddit missed analysts' projections of 103.3 million, with growth slowing down sequentially.
Nevertheless, Reddit exceeded revenue expectations for the fourth quarter and anticipates optimistic revenue in the first quarter. The company has benefited from content licensing agreements related to artificial intelligence with Alphabet and Microsoft.
Following the results, several brokerages adjusted their price targets for Reddit's stock, with six raising and one lowering their forecasts. Reddit's 12-month forward price-to-earnings ratio stands at 242.7, contrasting with Snap's 28.8 and Pinterest's 20.7.