Reddit's stock recently took a hit, and the reason boils down to a new, quiet experiment from a very big neighbor: Meta.
Meta, the parent company of Facebook and Instagram, has started testing a new app called 'Forum.' It's essentially a dedicated space for Facebook Groups, but with two key features that mimic Reddit: the ability to post with nicknames and an AI-powered 'Ask' tab for questions. This quiet launch immediately spooked investors, who worried that Meta's massive 3-billion-user ecosystem could easily divert traffic away from Reddit, even if 'Forum' is just a simple alternative.
So, why did this specific news cause such a reaction? There are a few layers to this. First, and most obviously, is the direct competitive threat. 'Forum' targets the casual user—someone looking for a quick answer or to browse a topic of interest, not necessarily the deeply engaged community members who are Reddit's power users. For this group, a 'good enough' Q&A experience integrated into a platform they already use daily could be very appealing.
Second, Reddit's high valuation made it vulnerable. Before the drop, the company's stock was trading at a significant premium compared to social media peers like Pinterest and Snap. This high EV/Sales ratio signaled that investors had very high expectations for future growth. When a competitor as large as Meta enters the picture, even with a small test, it introduces uncertainty. This can lead to multiple compression, where investors become unwilling to pay that same premium, causing the stock price to fall.
Third, the broader context matters. The tech world is shifting toward AI-powered search, where users get answers directly without clicking on links. Google's AI Overviews is one example. Meta's 'Forum' fits this trend perfectly by offering an integrated AI 'Ask' feature. This trend poses a structural risk to Reddit's model, which relies on users discovering its content through search engines. Meta's huge investments in AI infrastructure also signal that 'Forum' is a credible, long-term threat.
In short, the selloff wasn't about a mass exodus of users happening today. It was the market rapidly re-pricing the risk that a powerful competitor could intercept a key segment of Reddit's user base, casting a shadow over its once-bright growth story.
- EV/Sales (Enterprise Value-to-Sales Ratio): A valuation metric that compares a company's total value (including debt) to its annual sales. A higher ratio can mean investors expect high future growth.
- Multiple Compression: This occurs when a stock's valuation multiple (like EV/Sales) decreases. It often happens when investors' expectations for future growth become lower or more uncertain.
- DAUq (Daily Active Uniques): A metric measuring the number of unique individual users who visit a platform on a given day. It's a key indicator of user engagement.