Reddit Is Joining the S&P 500. Here’s What That Means for Investors

Reddit, the internet's most popular discussion forum, will join the S&P 500 on Tuesday, a milestone for the company just two years after it went public.

Reddit shares have risen more than 11% since Thursday afternoon, when the news broke that RDDT will replace AvalonBay Communities on the elite list. AvalonBay, a real estate investment trust, is merging with Equity Residential, creating an opening for Reddit.

Inclusion in the S&P 500 is more complicated than just being one of the largest publicly traded businesses in the U.S. A committee at S&P Dow Jones Indices selects companies that meet specific market cap and earnings requirements. Reddit satisfied them.

Stocks typically get a bump in price when they're added to the S&P 500. This is in part because certain index funds and exchange-traded funds must start buying shares of the company's stock, which increases demand.

Reddit's stock is still down about 2.3% over the past month because investors are concerned about a slip in U.S. daily users. This metric fell by about 300,000 from 53.5 million in the first quarter to 53.2 million in the second quarter, according to Reddit's July 30 earnings release.

Reddit also reported about $235 million in second-quarter stock buybacks, totaling about 1.5 million shares at an average price of around $157. Buybacks signal confidence and tend to buoy stock prices. Reddit stock was trading at $176 Friday afternoon.

What's going on with Reddit's stock?

Reddit stock is down more than 23% year to date even after the latest rebound. That's due to the internet-wide decline in Google traffic referrals amid the rollout of AI overviews, which has proven to be a headwind for the company.

Reddit threads have long featured prominently in Google results, particularly since the search giant added "Discussions and forums" results to search in 2022

In a recent earnings call, CEO Steve Huffman tried to position Reddit as the "antidote" to the flood of "synthetic content" online.

On Reddit, users interact in subreddits, or topic-based communities, and upvote and downvote each other's posts, which can be text-based opinions or questions, article links, art or images, etc.

"People are craving real, human perspective," Huffman said. "AI compresses the internet into summaries. Reddit delivers the opposite: deep discussions, passionate debates and lived experiences. People don't want a summary of Reddit. They want Reddit. As AI makes information more abundant, the challenge is no longer finding content. It's finding context, personal opinion and firsthand accounts."

Huffman discussed the growing value of Reddit data in an AI world. Reddit "is used for training, it's used for post-training to teach these models how to talk. It's used for grounding, it's used as a search index," Huffman said. "Reddit's data is valuable beyond just raw training data."

Executives also teased new advertising abilities, like multi-advertiser shopping ad carousels in Reddit searches.

Analysts expect that concerns about AI search and overviews will continue to weigh on the stock.

"Volatility in user growth due to external factors is likely to temper some excitement on the shares in the near term," Cantor Fitzgerald analyst Deepak Mathivanan wrote in a recent research note.