Should You Buy the Dip on Reddit Stock?
After soaring in 2024, shares of Reddit (NYSE: RDDT) are down about 25% in 2025, as of this writing. Reddit has continued to report impressive revenue growth as proof of its appeal to brands in a growing digital advertising market.
However, opinions on Wall Street have been mixed lately. This stems from Google's recent shift to artificial intelligence (AI) search summaries. Reddit wants as many visitors to its platform as possible to maximize its appeal to advertisers, but analysts believe Google's AI Overviews and other changes to its search algorithms will remove the need for people to go to Reddit.
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While investors should be mindful of this threat, there's still good reason to believe Reddit can deliver more growth for investors.
Image source: Getty Images.
Wall Street sours on Reddit over AI risk
Many Reddit users are looking for information on products they're thinking of buying. This is why advertisers continue to increase their spending on the platform -- ad revenue grew 61% year over year to $359 million in the first quarter.
But there is a threat from AI models like ChatGPT, Grok, and Google's Gemini, which can summarize all of the information a user needs based on simple search queries. Perplexity already has a deal with Shopify to let users buy products they find using its AI search engine.
Google's integration of AI in its search engine could pose a threat to Reddit's dependency on Google Search results to attract users. Wells Fargo analyst Ken Gawrelski downgraded the stock from overweight to equal weight after Reddit's first-quarter earnings report. The analyst believes Google's move toward AI-driven search will likely lead to declines in traffic to Reddit.
It's essential for investors to be aware of the challenge these AI models pose to Reddit's business. That said, these models have been around for several years now, and the company is still posting strong user and revenue growth. There is one important advantage Reddit has that AI can't compete with.
Why Reddit can thrive in the AI era
AI models are very efficient at providing summaries and answers, but it's not the same as interacting with other people. Even while usage of AI models increases, there will still be demand for online social interaction, which AI summaries can't quite replace.
Reddit's latest financial report shows people are still highly engaged with the platform and visiting in large numbers. It ended Q1 with over 400 million weekly active users and 108 million daily active users. These users have created over 100,000 communities on the platform.
Because many of these people are visiting Reddit to learn about products and services, it makes the platform the perfect vehicle for brands to invest. Average revenue per user grew 23% year over year in the quarter, which signals strong ad performance, improved targeting, and growing appeal of the platform to advertisers.
Reddit is even benefiting from the use of its data to train AI models. Its other revenue, including data licensing sales, grew 66% year over year to $34 million. The billions of posts and data it has collected from user interactions provide Reddit with a valuable asset and competitive advantage.
These are healthy indicators of a vibrant platform. Investors should be aware of the risks and monitor Reddit's earnings reports for signs of weakening momentum, but this is still a healthy, fast-growing business. The stock's recent dip is a buying opportunity.
Should you invest $1,000 in Reddit right now?
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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. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Shopify. The Motley Fool has a disclosure policy.
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