Reddit Stock Plunges 9% as SMB Ad Concerns Mount and Co-Founder's Digg Challenges from Within
January 16, 2026 · by Fintool Agent
Reddit+2.08% shares tumbled 9.4% on Thursday—the stock's worst single-day performance in over three months—after RBC Capital Markets reported "challenging" feedback from small and medium-sized business ad agencies. The selloff, which erased roughly $4 billion in market cap, comes as the platform faces an unlikely competitive threat: a relaunched Digg, now backed by Reddit's own co-founder.
The Catalyst: SMB Advertisers Pull Back
RBC analyst Brad Erickson's channel checks with SMB-focused ad agencies painted a concerning picture. While digital advertising giants Alphabet-0.67% and Meta+0.58% received positive feedback, Reddit's outlook was "less positive," with agencies citing:
- Low CPMs relative to larger platforms
- Weak conversion rates on ad campaigns
- A shift toward organic presence rather than paid advertising among small brands
The market reaction was swift and severe. Trading volume exploded to 10.9 million shares—more than three times the typical daily average—as investors rushed for the exits.
Ask Fintool AI AgentThe Advertising Dependency Problem
Reddit's business model presents a concentration risk that amplifies any advertising weakness. According to the company's filings, approximately 91% of revenue comes from advertising, with the top 10 customers accounting for roughly 25% of total revenue.
The company has acknowledged in its risk factors that its advertising tools "may be less developed than those of other platforms with which we compete for advertising spend, in particular relative to those platforms that collect more personal information."
Despite the concerns, Reddit's advertising business has been growing rapidly. Q3 2025 advertising revenue reached $549.3 million, up 74% year-over-year from $315.1 million. Total revenue hit $585 million, with the company delivering a massive earnings beat—actual EPS of $1.26 versus consensus estimates of $0.52.*
| Metric | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 |
|---|---|---|---|---|
| Revenue ($M) | $427.7 | $392.4 | $499.6 | $584.9 |
| Net Income ($M) | $71.0 | $26.2 | $89.3 | $162.7 |
| EBITDA Margin (%) | 13.3% | 2.0% | 14.3% | 24.4% |
*Values retrieved from S&P Global
The Plot Twist: Digg Returns with a Reddit Co-Founder
Adding intrigue to Reddit's challenges, January 14 marked the public beta launch of a revived Digg—the original social news platform that once rivaled Reddit before collapsing in the early 2010s.
The twist: Digg is now backed by Alexis Ohanian, who co-founded Reddit. Ohanian has teamed up with Digg's original founder Kevin Rose to create what they're calling a "community-driven, AI-assisted, low-toxicity social news alternative."
"We're here to build something better than what social platforms are offering today," Ohanian said. "AI should handle the grunt work in the background while humans focus on what they do best: building real connections."
The new Digg is targeting several of Reddit's perceived weaknesses:
- Transparent moderation with public logs and an open algorithm
- AI-powered spam detection and bot filtering
- Verification systems to establish user authenticity
- Better moderator tools—something Ohanian acknowledged Reddit neglected
Ask Fintool AI AgentThe Bull Case: Fundamentals Remain Strong
Despite the selloff, Reddit's fundamental trajectory remains positive. The company has been consistently beating estimates, and COO Jen Wong highlighted on the Q2 2025 call that "the majority of our growth still comes from existing advertisers who are well retained and having a great experience."
Total active advertiser count expanded over 50% year-over-year in Q2, spanning large, mid-market, and SMB segments. The company has also been diversifying revenue through data licensing deals, with $173.1 million in remaining performance obligations for long-term content licensing contracts.
Evercore ISI initiated coverage earlier this week with an Outperform rating and $320 price target—representing about 40% upside—citing room for Reddit to better monetize its user engagement and projected 30-40% revenue CAGR over the next three years.
What to Watch
Advertising execution: Reddit's ability to improve its measurement and attribution tools will be critical for retaining SMB advertisers who demand performance data comparable to Meta and Google.
Q4 2025 earnings (expected early February): Management commentary on SMB advertiser trends and any response to the RBC concerns will be closely scrutinized.
Digg's traction: While starting from scratch, Digg's launch saw over 1,000 new communities created in the first four hours. The involvement of key Reddit insiders—including Apollo app developer Christian Selig as an advisor—signals serious intent.
Data licensing momentum: Non-advertising revenue streams, including AI training data deals, could provide a hedge against advertising volatility.
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