Why Reddit Stock Just Gained 10.7%

The Motley Fool · 1d ago

Key Points

Reddit stock surged 11% after the company was announced as a new addition to the S&P 500, replacing AvalonBay Communities on Aug. 18.
JPMorgan estimates index funds will need to purchase approximately 16.7 million Reddit shares to match the index's weighting.
Despite strong Q2 results with 61% revenue growth, Reddit faces a looming threat from AI search, reducing click-through traffic to its platform.
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Reddit, Inc. (NYSE: RDDT) stock was up 10.7% as of 2:22 p.m. ET today while the S&P 500 and Nasdaq Composite were down 0.2% and 0.4%, respectively.

Shares of the social media company are flying after it was announced that Reddit would join the S&P 500.

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Why Reddit is joining the S&P 500 now

S&P Dow Jones indexes said after the close on Thursday that Reddit will replace AvalonBay Communities in the S&P 500 before the market opens on Aug. 18. AvalonBay was just acquired by Equity Residential, freeing a slot in the index outside the usual rebalancing schedule.

Funds that track the S&P 500 have to own every company in it, at whatever weight the index assigns. The buying is automatic and mechanical. JPMorgan estimates that, in total, about 16.7 million Reddit shares will be bought up.

Traders on the floor of a stock exchange.

Image source: Getty Images.

Reddit's growth is impressive, but there's a catch

Reddit generated $805 million in second-quarter revenue, up 61% year over year (YoY), while net income reached $253 million. Daily active users -- a key metric for social media platforms -- increased 18%.

That all sounds very positive, but it obscures a major issue the platform is facing. AI search results are more and more keeping users from clicking through to Reddit itself. If this trend continues, it could spell real trouble for a company that needs to keep growing at a rapid pace to support its valuation.

JPMorgan Chase is an advertising partner of Motley Fool Money. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Reddit. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.