(Reuters) – Reddit shares tumbled 13% in premarket trading on Thursday after the social media firm missed expectations for daily active unique visitors, hit by a change in Google’s search algorithm.
The algorithm change impacted how frequently the platform popped up in Google search results.
The user growth issues caused by the algorithm change might keep Reddit’s stock under pressure in the near term, Morgan Stanley analysts said.
Reddit experienced some volatility with Google search in the fourth quarter, triggered by a periodic algorithm change, but traffic from the search has recovered in the first quarter, CEO Steve Huffman said in a letter to shareholders.
“It sounds to us an aberration,” Piper Sandler analysts said.
Daily active unique visitors rose 39% to 101.7 million in the fourth quarter for Reddit, but missed analysts’ average estimate of 103.3 million, according to data compiled by LSEG. The growth has also slowed sequentially.
Despite the hiccup, Reddit’s fourth-quarter revenue beat estimates and the company forecast an upbeat first-quarter revenue.
Reddit has been reaping the rewards of the artificial-intelligence content licensing deals with Alphabet’s Google and Microsoft-backed OpenAI.
At least six brokerages raised the price target for the stock and one cut, following the results.Reddit has a 12-month forward price-to-earnings ratio of 242.7, compared with Snap’s 28.8 and Pinterest’s 20.7.
(Reporting by Joel Jose in Bengaluru; Editing by Shinjini Ganguli)