Reddit Shares Fall 16% in a Day after Promoters Sell One Million Shares

• The Reddit stock fell more than 16% in a day after the CEO and CEO sold 500,000, and 514,000 shares respectively.
• The stock has fallen more than 30% in the last three trading days after Hedgeye said that the stock is overvalued.
• However, there are experts like New Street Research, that have given a target of $54 for the stock.

Reddit's stock market journey has been rather topsy-turvy in its six days of listing. The stock was listed on NASDAQ on 21st March at a price of $47 against an issue price of $34, giving the investors around 38% in listing gains. Reddit aimed to raise $750 million with its IPO at a valuation of $6.4 billion.

The stock saw its biggest surge on 25th March gaining 30% in a single day with a high of $61.94.

However, 26th March saw a complete U-turn in the stock's momentum. Although the script opened at a price higher than 25th March and rallied all the way up to $74.9, it started making a quick deceleration, and closed below the day's opening price.

Since then Reddit has fallen by up to 24% in the last two trading days, closing at $49.32 on Thursday. Experts believe that Reddit's $60 million AI content licensing agreement with Google has already been factored into its prices.

Reasons for the Reddit Stock FallAlthough this is the first major social media IPO since Pinterest in 2019, the market sentiments have been mixed. Andrew Freedman, an analyst at Hedgeye, has said that the stock is grossly overvalued' and that he will be looking for opportunities to short the stock.

He believes that Reddit has played it smart by timing its IPO close to its quarterly earnings release. Reddit is expected to release its reports for the first quarter of 2024 by the end of May.

Since this will be the company's first report after going public, the stock may show some temporary upward movement. However, Freedman believes that reports in the long run might not be that favorable and the company might experience a decline in its revenue.

In what could be another major reason for Reddit's prices falling, CEO Steve Hoffman sold 500,000 shares while Jennifer Wong, Chief Operating Officer at Credit, sold 514,000 shares.

Promoters of the company selling their shares is never a good sign. This is what led to the share falling by 14.6% on the last day of trading.

As per Freedman, the company's correct valuation is at around $34, which is also the initial issue price. If the stock does come down to that level, investors could see another 30% fall in the prices. This will wipe off the entire listing gain of investors who have not sold their shares.

Read more: Reddit receives an inquiry request from FTC about its AI-related deals

The Bright Side

On the brighter side, there are many investors backing Reddit to perform well. Analyst Dan Salmon from New Street Research expects Reddit's revenue to hit $1.16 billion in 2024 and $1.55 billion in 2025.

Salmon has set a price target of $54 for Reddit's stock.

The volatility in Reddit stocks isn't something unexpected. This is because Reddit's IPO was also open to subscription to some selected Reddit users.

However, unlike other investors, they were not subjected to any lock-in period and could sell their shares whenever they wanted, which has predictably led to volatility in its prices.

Salmon believes the stock can remain volatile for the next three months, which is until its lock-up period expires. The stock might show signs of stability after its earnings release in May.

Reddit also has the backing of some popular investors in the US market.

• Its largest investor is Advanced Magazine Publishers, owning a 30% stake in the company
• Tencent, the popular gaming company, owns close to 11% stake.
• Sam Altman-backed OpenAI also owns 8.7% of Reddit.

With contrasting market views, it will be an interesting three months for Reddit on the NASDAQ.

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