Reddit stock crashes nearly 25% a week after IPO debut

It seems like the euphoria surrounding Reddit’s stock market debut has come crashing down. The social aggregation giant, Reddit, set the stage for its Initial Public Offering (IPO) on March 21st, with shares initially skyrocketing as high as 70% in NYSE debut. However, just a week later, the company faced a harrowing plummet of nearly 25% in share price.

According to reports from CNBC, Reddit’s shares are witnessing a freefall following the excitement generated by the company’s recent IPO. The week concluded with shares settling at $49.32, dipping below the closing price on Reddit’s debut day on the New York Stock Exchange, which stood at $50.44, CNBC reported. Notably, stock markets remained closed on Good Friday, adding to the subdued atmosphere.

Despite its history of annual losses since its inception in 2005, Reddit managed to captivate investors by positioning its platform as a playground for AI development, thanks to a lucrative $60 million AI content licensing deal with Google.

But the downward trajectory of Reddit’s shares commenced mid-week, with a significant 11% drop on Wednesday, closing at $57.75. Hedgeye Risk Management characterized Reddit’s stock as “grossly overvalued” in a report referenced by Bloomberg News, landing the company on the firm’s “short bench.”

In a corporate filing earlier this week, Reddit’s CEO, Steve Huffman, made headlines by selling 500,000 shares, while the company’s Chief Operating Officer, Jennifer Wong, offloaded 514,000 shares, retaining 1.4 million of the company’s shares. This move, although expected by some, raised eyebrows among investors, prompting questions about insider confidence in the company’s future.

Ben Silverman, VP of Research at Verity, highlighted the dual purpose of taking a company public, emphasizing the generation of liquidity for expansion alongside facilitating insiders to cash out. Silverman’s remarks underscored investor concerns surrounding the motivations behind insider selling amidst the backdrop of Reddit’s recent volatility.

“There’s always a bit of a disconnect, because the purpose of bringing the company public is twofold,” Silverman said. “It’s not just to generate liquidity for the company itself so that it can expand and grow. In these situations, it often allows insiders to cash out to generate liquidity, and that’s something investors have to consider here.”

Reddit’s shares kicked off the week on a high note, surging by 30% on Monday, followed by an 8.8% increase on Tuesday, closing at $65.11. However, despite this optimism, New Street Research issued a neutral rating on the company, maintaining a $54 price target and predicting volatility leading up to the first earnings report.

The journey to this public listing has been a long and winding road for Reddit, spanning over two years since its confidential IPO filing back in December 2021. Economic headwinds caused by the Fed’s actions prompted delays, but now, the stage is set for Reddit’s moment in the spotlight.

Analysts have voiced concerns over the stock’s valuation, with the CEO and COO’s significant share sell-offs contributing to investor jitters. As is common with newly public companies, Reddit’s rollercoaster ride in the stock market serves as a reminder of the unpredictable nature of IPOs and the accompanying short-term fluctuations.

Founded in 2005 by Alexis Ohanian, Reddit has transformed into a social news aggregation powerhouse, attracting billions in monthly traffic. As it prepares for its IPO, Reddit’s journey exemplifies the resilience and dynamism of tech startups in the ever-evolving landscape of digital innovation.