Wells Fargo downgrades $RDDT, warning Google’s AI search could permanently damage Reddit’s growth engine. As Reddit leans into AI partnerships and licensing revenue, the question now is: can the numbers still keep up with the story?

Just weeks after Reddit’s blowout Q1 earnings, which sent shares soaring nearly 20%, Wells Fargo dropped a bombshell downgrade, cutting Reddit to Equal Weight from Overweight and lowering the price target from $168 to $115.

The note, led by analyst Ken Gawrelski, paints a stark picture of Reddit’s future if the platform’s massive “logged-out” user base erodes under pressure from AI-driven search changes. The very surge in Reddit’s value — its position as a top Google search result and data wellspring — could now be its weakness.

Wells Fargo: Logged-Out Users at Risk, Growth Story Weakening

According to Wells Fargo:

  • Google’s new AI-overview search tools may cannibalize Reddit’s referral traffic — particularly affecting logged-out users, who make up 55% of Reddit’s total user base, but only contribute about 15% of ad revenue.
  • The bank cut its 3-year DAU CAGR estimate from 13% to 10%, arguing Reddit can’t meet market expectations by monetizing only logged-in users.
  • Analyst quote:
    “RDDT unlikely to fulfill market expectations for advertising growth on logged-in users alone. Comparison to META suggests outcome is unrealistic.”

The real concern? Reddit’s logged-out users, while not high earners per click, are vital for growth — they often become logged-in users, who then drive ad dollars. As AI search reduces this top-of-funnel traffic, the entire user acquisition model may be under pressure.

Wells Fargo estimates:

  • 2026/2027 ad revenue cut by 6%/14%
  • EBITDA forecast lowered to $900M/$1.1B, down from $986M/$1.4B
  • Valuation multiple revised to 20x 2027 EBITDA, down from 22.5x

Their bottom line: Reddit would need a 3-year revenue CAGR of 25% to justify its valuation — a level that would require monetization rates on par with Meta, which they call “unrealistic.”

Q1 2025 Earnings Recap: Impressive Growth, Strong Margins

Despite the downgrade, Reddit’s recent performance was undeniably strong:

  • Revenue: $392.4M (+61% YoY)
  • Net income: $26.2M (vs. -$575M Q1 last year)
  • Free cash flow: $126.6M (vs. $29.2M in Q1 ‘24)
  • EPS: $0.13 vs. $0.02 est. (+550% surprise)
  • Daily Active Users: 108M (+31% YoY)
  • Gross Margin: 90.5%
  • Ad Revenue: $358.6M
  • International Rev Growth: +82% YoY

The company has clearly made financial strides, posting consistent margin expansion and turning profitable in both net income and cash flow. But Wells Fargo argues that the underlying growth channels could be disrupted before they fully pay off.

Reddit’s AI Strategy: Is Licensing a Double-Edged Sword?

Reddit isn’t standing still. Its strategic AI partnerships are part of why its valuation surged:

  • In May 2024, Reddit struck a deal with OpenAI, giving ChatGPT access to Reddit content via API. OpenAI also became an advertising partner.
  • Reddit previously signed a $60M/year licensing deal with Google for access to its content to train AI models.
  • CEO Steve Huffman has positioned Reddit as a “living archive of real, relevant human conversation,” critical for the future of AI models.

But here’s the conflict: licensing Reddit’s content to outside AI tools may undercut Reddit’s own growth loop.

Wells Fargo writes: “Data licensing business is incompatible with maximizing value of the RDDT community and ad-based monetization… disintermediation risk is rising.”

In other words, the more AI tools rely on Reddit’s data off-platform, the less incentive users have to visit Reddit itself. That could weaken ad impressions, user acquisition, and even future licensing leverage.

Why the Valuation Looks Wild — But Isn’t

  • P/E ratio: 173.94
  • Sector average (Internet Content & Info): ~33.6
  • Gross margin: 90% vs sector avg. of ~64%
  • Price target range: $75 (low) – $244 (high)
  • Mean target: $161.36 (vs. current $113)

Yes, the P/E is nosebleed. But Reddit is not your typical social media stock — it’s a data aggregation powerhouse, with AI monetization, high margins, and global reach.

Analysts are bullish:

  • 16 analysts: Buy
  • 9: Hold
  • 1: Sell

The Risk Factor: Google Search May Kill the Reddit Referral Loop

Several firms — including Wells Fargo, Barron’s, and Investopedia — warn that Google’s AI-overview may harm Reddit’s search engine traffic. Reddit posts have long been top hits in Google searches, boosting ad impressions and DAU retention.

If AI-generated summaries reduce traffic to Reddit:

  • Ad revenue growth could slow
  • DAU compounding could stall
  • Valuation could compress

Wells Fargo downgraded RDDT, saying the impact of AI search changes is likely “structural and permanent.”

The Real Value: Reddit as a Content Gateway

Reddit’s core strength lies in moderated community knowledge:

  • Karma and downvotes = soft ideological filters
  • Subreddits = high engagement niches
  • “Front page of the internet” effect still holds

Despite criticism of moderation bias, Reddit thrives because:

  • Users choose convenience > friction
  • Forums, blogs, or independent platforms can’t match Reddit’s reach
  • Reddit content = AI training gold

The Verdict

Reddit isn’t just riding the AI wave — it’s helping power it. The platform is now a cornerstone of language model training and algorithmic summarization. Its content is valuable, its margins are strong, and its growth — until now — has been exceptional.

But the Wells Fargo downgrade marks a shift in the narrative. Investors must now ask not just whether Reddit can profit from AI, but whether AI will hollow out the very mechanics that made Reddit valuable in the first place.

For now, Reddit is profitable, cash-rich, and strategically aligned with AI giants. But its valuation leaves little room for error — and in the fast-moving world of AI, error may arrive as a perfectly summarized answer at the top of a Google search.