Reddit Shares Jump 12% After S&P 500 Inclusion Announced, Stock Still Down 31% This Year

Reddit is getting a promotion. S&P Dow Jones Indices announced Thursday, August 13, that the platform will join the S&P 500 on Tuesday, August 18, replacing AvalonBay Communities, according to the release cited by CNBC and multiple other outlets.

Shares jumped between 11% and 12.6% in extended trading Thursday, depending on which report you check. CNBC and PrimeXBT put the move at 11%. Crypto Briefing and TradingKey clocked it at roughly 12.45%. Dow Jones Newswires, via Morningstar, reported the stock rose 11% to $175.12 after hours. Wall Street's passive money is about to be forced to buy this stock whether it wants to or not.

AvalonBay is being acquired by Equity Residential, a merger that shareholders of both apartment REITs approved this week with more than 99% of votes cast, according to Ground News. That deal is expected to close as soon as Monday, August 17, which creates the vacancy Reddit fills. The combined AvalonBay-Equity Residential entity will reportedly be renamed Vivmark Residential and stay in the index. Separately, Sun Communities will join the S&P MidCap 400 on August 20, replacing Webster Financial, which is being acquired by Banco Santander.

Why the stock pops on this kind of news

Roughly $13 trillion in assets tracks the S&P 500 directly, according to EBC Financial Group's analysis. When a company gets added, every fund that mirrors the index has to buy shares to match, regardless of whether the fund manager thinks Reddit is a good investment at current prices. That mechanical buying is what moves the stock, not some new judgment about Reddit's business.

Reddit becomes only the second pure-play social media company in the S&P 500, joining Meta Platforms, according to CNBC. Pinterest and Snap, both of which went public before Reddit, remain too small by market cap for inclusion. Twitter was in the index once, before Elon Musk bought it in 2022 and renamed it X, now owned by xAI.

The index bump historically fades, and fast

EBC Financial Group's research team pulled S&P Dow Jones Indices' own data showing the "inclusion premium" has been vanishing for decades. Median excess returns for newly added stocks ran +8.32% from 1995-1999, fell to +3.64% from 2000-2010, and dropped to -0.04% from 2011-2021. Three decades ago, getting added to the S&P 500 meant a real, lasting bump. Now it's basically a coin flip, even though trading volume around the rebalance date can still spike dramatically.

EBC's own framing is blunt about what this means for Reddit specifically: once the forced index buying wraps up around the August 17-18 rebalance, "further upside will have to come from Reddit's earnings, valuation and continued demand for the shares." Not from the index trophy.

The business problem the index bump doesn't fix

Reddit's fundamentals, on paper, look strong. The company posted its eighth straight quarter of sales growth topping 60% in its late-July earnings report, according to CNBC. Crypto Briefing reported the specifics: revenue of $805 million, up 61% year-over-year and above the roughly $730 million analyst consensus. Net income jumped to $253 million from $89 million a year earlier. Advertising revenue rose 64% to $762 million, and daily active users climbed 18% to 130 million. The company guided third-quarter revenue to $860-870 million, above forecasts.

None of that stopped the stock from tanking more than 20% after that earnings report, according to Crypto Briefing. The reason: Reddit told investors its "search referrals were choppy," language CNBC and other outlets flagged as the real worry. CEO Steve Huffman attributed the volatility to Google increasingly pushing its Gemini-powered AI Overviews, which can intercept search traffic before it ever reaches Reddit's forums.

That's the tension sitting underneath Thursday's rally. Reddit is a company growing revenue at 60%-plus for two straight years, with daily active users up 18%, and it still finished trading down about 31% to 32% year-to-date, according to both Morningstar and TradingKey. The stock priced at $34 in its March 2024 IPO; even Thursday's after-hours pop to roughly $175 reflects a business that's grown enormously since going public, but one whose reliance on Google's search algorithm remains, in TradingKey's words, an unresolved question about "long-term traffic sustainability."

The mechanical S&P 500 buying happens on schedule, before the market opens August 18. Whether Reddit's advertising growth and user numbers can keep outrunning its Google dependency is not something an index committee vote settles.