Why Reddit Stock Is Plummeting Today

Key Points

• Tech stocks are getting hit with big sell-offs this week, and Reddit is participating in the pullback.

• Inflation concerns raised by earnings updates from Target and Home Depot are contributing to sell-offs for Reddit stock.

• A recently published report from MIT found that most businesses are getting zero return on their AI investments.

• 10 stocks we like better than Reddit ›

Reddit (NYSE: RDDT) stock is getting hit with a sharp valuation decline on Wednesday. The social media company's share price was down 4.8% at noon ET and had fallen as much as 10% earlier in trading. At noon, the S&P 500 was down 0.5% and the Nasdaq Composite was down 1.2%.

Reddit is under pressure due to multiple bearish catalysts today. In addition to recent quarterly reports from major U.S. retailers that have raised alarms about the outlook on inflation, a report from the Massachusetts Institute of Technology (MIT) is causing investors to become more cautious about valuations for artificial intelligence (AI) stocks.

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Tariff news from retail giants has implications for Reddit stock

Even though Reddit has little direct exposure to the U.S. retail market, recent quarterly reports and business updates from Home Depot and Target have implications for its valuation. With its Q2 report yesterday, Home Depot changed its previously stated stance and said that it would be increasing prices on some products because of tariffs. Today, Target published its own second-quarter results and said that it was facing pressures from tariffs and seeing weak consumer spending trends. Investors are worried that tariff-driven inflation will cause the Federal Reserve to hold off on interest rate cuts and create a less favorable backdrop for stocks.

A new report from MIT is also spurring sell-offs for Reddit stock

Revenue from data licensing for AI models has played a huge role in Reddit's stock gains this year. Now a new report from MIT is contributing to a substantial valuation pullback. Even with recent sell-offs, the stock is up 32% year to date -- and it's surged 100% over the last three months.

MIT's recently published research found that 95% of surveyed organizations are getting no returns from the money they've poured into generative AI. While the long-term outlook for artificial intelligence remains very promising, the university's report highlights valuation risks on the heels of big run-ups for AI stocks this year.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.