Reddit (RDDT) shares tanked on March 26 after a California jury found Meta Platforms (META) and Alphabet’s (GOOG) (GOOGL) Google liable for social media addiction, awarding a plaintiff $6 million in damages.
The ruling — which treats social media design as a defective product — sent shockwaves through the sector. As a result, RDDT sank below its 20-day moving average (MA), signaling a breakdown in short-term bullish momentum.
Year-to-date, Reddit stock is now down nearly 50%, but there’s still reason to keep on the sidelines in this forum social media platform.
The aforementioned decision that a Los Angeles jury delivered on Thursday is particularly bearish for RDDT shares, as it establishes a dangerous legal precedent for the entire industry.
Unlike previous cases shielded by Section 230, this trial focused on product design, specifically addictive features like infinite scrolls and autoplay.
Investors bailed on Reddit this morning primarily because, as a platform built on high-engagement feeds and gamified community interactions, it now faces a much higher litigation risk.
Investors fear the Big Tobacco moment for social media has arrived, which may force RDDT to dismantle its core engagement features.
This could lead to lower user retention, reduced ad impressions, and materially higher compliance costs across its global operations.
Beyond the courtroom, Reddit shares are grappling with significant internal and structural red flags.
Recent filings reveal a troubling wave of insider selling. Most notably, Chief Technology Officer Christopher Slowe unloaded $1.34 million worth of company shares this week.
This may signal a lack of confidence in the firm’s current valuation.
Additionally, the put-to-call ratio on options contracts expiring in May sits at 1.03x currently, signaling a bearish skew. The lower price on those contracts at roughly $101 suggests RDDT could tumble another 19% from here.
Despite the above-mentioned risks, Wall Street remains bullish as ever on Reddit, especially after its market-beating Q4 results and the $1 billion buyback announcement.
