In the biggest social media initial public offering (IPO) since Pinterest (NYSE:PINS), Reddit Inc (NYSE:RDDT) took the investing world by storm after staging a substantial rally following its debut. Yet, Reddit stock recently lost all of these gains, and some on Wall Street believe there is more downside risk.
RDDT IPO
Last month, social media platform Reddit made headlines after its long-awaited IPO delivered triple-digit gains to investors.
Reddit stock, which debuted at $34 per share on March 21, surged more than 120% in days after the offering. The company’s existing investors raised nearly $750 million from the IPO.
The platform’s moderators and users, collectively referred to as 'Redditors', have made millions of dollars as a group.
They, along with their friends and family, had the opportunity to invest in Reddit's IPO through a directed-share program, similar to what companies like Airbnb Inc (NASDAQ:ABNB), Rivian (NASDAQ:RIVN), and Doximity Inc (NYSE:DOCS) have done in the past.
Sam Altman, the CEO of OpenAI and an early investor in Reddit who also served on its board, saw his investment in the company increase from $200 million to more than $613 million following the company's debut on the New York Stock Exchange (NYSE).
However, Reddit stock lost all of those gains in the more recent period. The company’s shares closed just below the $47 mark on Wednesday, dropping below $50.44, their closing price on the debut day.
The downturn began last Wednesday when Reddit stock plunged roughly 11% in the wake of a report by Hedgeye Risk Management, which labeled RDDT as “grossly overvalued" and noted that the company had been placed on the firm’s "short bench."
Moreover, Reddit revealed in last week’s regulatory filing that CEO Steve Huffman had sold 500,000 shares. Commenting on this, Ben Silverman, vice president of research at Verity, told CNBC that Huffman's sale was anticipated and only represented "a portion of his holdings."
The RDDT stock lost more than 25% over the past 5 trading days.
Reddit stock overvalued - Bernstein
The recent negative sentiment surrounding Reddit stock has been also noted on Wall Street.
In a Wednesday note to clients, Bernstein analysts initiated their coverage of RDDT with an underperform rating, describing the social media platform as “an institutional meme stock.”
“An unprofitable business, IPO a liquidity event with heavy exec selling, Redditors themselves apathetic, and investors wondering whether mid-sized social platforms are structurally disadvantaged and too sub-scale to compete,” analysts wrote.
They noted that Reddit faces demand challenges similar to those that smaller social platforms have encountered, including genuine structural limitations affecting ad targeting, measurement, and consumer purchasing intent.
“If Pinterest and Snapchat continue to struggle to live up to their potential with higher engagement/commercial intent, better ad tools, and decent social graphs, what hope does Reddit have with their worst-in-class engagement, anonymous user base, and NSFW content?” Bernstein analysts asked.
Improving user engagement and accelerating revenue growth often involves compromises, making the goal of achieving both profitability and scale elusive, they explained.
Bernstein set a target price of $40 for RDDT, implying a downside potential of 15%.
As a near-term play, Bernstein views the outlook as promising, citing Reddit’s leading growth in users (27% Y/Y) and revenue (21% Y/Y) in 2023. With conservative 2024 targets of 20% revenue growth and a move towards EBITDA break-even, bolstered by strategic Google (NASDAQ:GOOGL) data licensing and potential additional deals, Reddit's ad business is poised for expansion.
Meanwhile, analysts at Baird Equity Research started Reddit stock coverage with a Neutral rating, citing a lack of visibility for additional upside potential compared to their estimates.
However, Baird acknowledged that RDDT’s company profile “should resonate well with investors given a positive growth and margin trajectory.”