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Technology
RYAN DEFFENBAUGH

Reddit Stock Rallies Back To New Highs. How It's Shaking Off Google AI Fears.

After a deep slump this spring, Reddit stock is back at record highs. The IBD 50 stock has been rallying since its Q2 earnings report blew away estimates.

Shares of the social media player were ahead more than 4% at 233.65 in recent action on the stock market today. Reddit stock has gained 45% since the company reported second-quarter results on July 31.

That has helped Reddit stock get its rally back on track. Riding strong digital advertising growth, Reddit stock surged more than 300% after its March 2024 IPO price to a record 230.41 in February.

Shares then sank as low as 79.75 by early April. Fears about tariffs hitting digital advertising weighed on the stock, similar to social media peers Meta Platforms, Snap and Pinterest.

But Reddit stock also was hit by concerns that its reliance on Google search for daily active user growth would leave it vulnerable. Reddit's user growth took a hit as the search giant shifted its focus to providing AI overviews along with linkouts to other sites.

But Reddit wowed with 78% revenue growth for its June quarter. And Jefferies analyst John Colantuoni said Reddit was "silencing the DAUbters" after Reddit's daily active users (DAUs) grew a better-than-expected 21% year-over-year to 110.4 million.

Reddit's Search Focus

Reddit has worked to drive more users directly to its app and website to help ease it reliance on Google referrals. Late last year the company launched a "Reddit Answers" feature that relies on AI to directly respond to queries by pulling from previous Reddit user conversations.

"Reddit is one of the few platforms positioned to become a true search destination," Chief Executive Steve Huffman told analysts following the company's Q2 report. "We offer something special, a breadth of conversations and knowledge you can't find anywhere else. Every week, hundreds of millions of people come to Reddit looking for advice, and we're turning more of that intent into active users of Reddit's native search."

Huffman added that Reddit's core search product had 70 million weekly users. Reddit Answers, meanwhile, reached 6 million users compared to 1 million in Q1.

Reddit's breadth of content also makes its data valuable to developers of AI chatbots, such as OpenAI's ChatGPT and Google's Gemini. Reddit has licensing deals that allow both companies to train AI algorithms with Reddit data. Meanwhile, the social media firm sued Anthropic earlier this year for allegedly using Reddit data for training without license to do so.

In turn, AI chatbots are increasingly referring users to Reddit. Research firm Sensor Tower estimates that visits to Reddit from U.S. users climbed 28% year-over-year in the second quarter. Some of its growth can be "attributed to increased traffic from chatbots, which frequently cite Reddit in their responses," the firm's research report said.

Wall Street's Take On Reddit Stock

Jefferies' Colantuoni reiterated a buy rating for Reddit stock following its Q2 report.

"Another commanding beat/raise underscores Reddit's attractive opportunity to deepen/broaden advertiser spending through performance enhancements, new products, and easing usability," he wrote to clients.

Of the 29 analysts following Reddit stock, 18 rates it a buy or equivalent, according to FactSet. There are 10 analysts who are neutral and one sell call for Reddit.

BofA Securities Justin Post is among those who are neutral.

"Bulls will focus on Reddit's July month-over-month user growth commentary, and strong 2Q revenue growth and guide, which reinforces that user volatility has limited impact on a strong ad growth trajectory," Post wrote to clients following Reddit's Q2 results. "We think user trends, and the stock, may remain volatile, though Reddit can ramp marketing spend to aid user growth."

Reddit Stock On IBD 50

Meanwhile, Reddit stock is on the IBD 50 flagship list of top growth stocks. It also on IBD's Tech Leaders list and IPO Leaders list.

Shares have gained 42% year-to-date.

Reddit stock has an IBD Composite Rating of 94 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.

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