As Google Embraces AI, One Stock Is Losing Out. Others Are at Risk.
Reddit stock has dropped about 40% this year.
Reddit stock has taken a beating as investors worry how Google's new artificial-intelligence search features could dent the social-media platform's traffic. Other companies like Pinterest could also take a hit.
Reddit stock has dropped 40% so far this year, even though the company reported better-than-expected earnings and revenue growth for its March quarter. This comes as growth in daily active users slows while Alphabet's Google updates its search functions.
Google has been under a lot of pressure in recent months to prove it can be a winner in the AI search race. That's been more of a challenge than one might expect for the longtime search leader, because generative-AI chat bots like OpenAI's ChatGPT and Perplexity attract new users with quick, detailed, and conversational answers to user questions. One way Google has tried to combat this is through the introduction of AI Overviews, or AI-generated answers to search queries that appear on the top of the page.
These AI Overviews pose a challenge for companies like Reddit, which rely on gaining traffic by users who click on their links in Google search.
Things just got more complicated for Reddit and its peers, too. Google announced on Tuesday that it's integrating AI into its search engine through AI Mode—which will give users the ability to ask more complicated queries versus traditional searches in a conversational chatbot interface.
Baird analyst Colin Sebastian wrote in a Tuesday research note that the launch of AI Mode 'will provide answers to questions that users might otherwise click-through to Reddit links for more details.' He lowered his price target on Reddit to $120 from $140 while maintaining a Neutral rating on the stock.
Reddit directed Barron's to Reddit CEO Steven Huffman's comments on the company's May 1 earnings call.
'We do expect some bumps along the way from Google because we've already seen a few this year,' he said at the time, adding that as the 'search ecosystem is under heavy construction, the near term could be more bumpy than usual.'
Reddit stock dropped 2.2% on Tuesday and 9.3% on Wednesday following Google's announcement, while the S&P 500 dropped 0.4% and 1.6% on those days, respectively. Reddit stock was gaining back some of those losses on Thursday, rising 4% to $99.64.
Reddit isn't the only company that could see further slowdown in active users following this Google update. Photo-sharing platform Pinterest could see a decline in traffic if Google's AI Mode shows users pictures that stop them from needing to look at Pinterest posts.
'Our ability to maintain and increase the number of users directed to our platform from search engines is not within our control,' Pinterest said in its Risk Factor section of its most recent annual 10-K filing in February. 'Search engines, such as Google, have and may continue to modify their search algorithms…and policies or enforce those policies in ways that are detrimental to us.'
Shares of online education company Chegg have fallen sharply this year. The company alleged back in February that the rise of AI Overviews have 'had a profound impact on Chegg's traffic, revenue, and workforce.' This led Chegg to sue Google. The latest AI Mode update can't be good news for the textbook seller moving forward.
Chegg and Google both didn't immediately respond to a request for comment.
AI Mode still hasn't been fully rolled out in the U.S., so now is the time for investors to decide whether the risk is worth taking for stocks that rely on Google clicks.
Write to Angela Palumbo at angela.palumbo@dowjones.com
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