Reddit (RDDT) stock is under pressure Wednesday morning after a bearish report from Hedgeye. The research firm has identified Reddit as a short idea, arguing that the recent rally left the stock's price "overvalued." Hedgeye predicts a 50% plunge in Reddit's stock from its initial public offering (IPO) price, citing concerns over the company's lack of long-term ability to expand into international markets due to its "niche platform" status.
Yahoo Finance's Josh Schafer breaks down the details.
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Editor's note: This article was written by Angel Smith
Video Transcript
- We're also watching some additional news here. Reddit shares fall now over 13%, nearing 14% here in the trade. That comes as research firm Hedgeye added the social network as a new short idea in a recent report.
Reddit shares had previously gained nearly 100% after last week's initial public offering. Joining us now to discuss our very own, Josh Schafer.
- Yeah. So I'm taking a look at this Hedgeye report here, and overall, it seems like largely a valuation calling, just simply the rally we've seen in Reddit shares over the past couple of days maybe being a little bit much for this newly-issued company
Hedgeye had put Reddit on-- they call it a short bench-- coming into the IPO, and they were curious to see where the stock would go. They now say given this rally that Maddy just referenced over the past couple of days, it's entered meme stock territory.
When they wrote this report, it was at $65 per share. They called that overvalued. They said they see 50% downside in its original IPO price.
And some of the key points that highlight here-- they call Reddit a niche platform, and they say that it will not have a long-standing reach into potentially international markets, part of that being that Reddit relies largely on English.
And then interesting in here as well. Just looking at the valuation for Reddit, when you're taking a look at it at $75 per share, there's a chart in this Hedgeye report that puts it as the most valued-- most highly-valued internet or media stock in their coverage. That would be above stocks like Netflix, above stocks like Pinterest, even Snapchat-- the stocks that are in that Reddit realm.
They're basically saying the valuation they feel like got a little bit too high here. And then you add in, I think, the long list of questions that a lot of investors have given that the company just came public on the overall growth trajectory.
Just saying when you put that together, we probably need to see a little bit more here. And overall, it seems like even if they were to get some of the high-end parts of the growth metrics that Reddit has released, Hedgeye just doesn't think they can quite make it there.
- Yeah, it's a very bullish-- ah, bullish-- very bearish call out here from Hedgeye. I'm so used to everyone being so bullish about things these days of the market's not too far from all-time highs. But Hedgeye clearly very bearish on Reddit here at this point.
What stuck out to me was what you just referenced there-- what they see in the second half of this year, what they see in the first half of 2025-- that 50% downside to the original IPO price.
Josh, how do you square that to the conversations that you were having yesterday? When we were talking about the frenzy that has been surrounding many of these stocks that are now categorized as meme plays and how that really tells us or what that really tells us about where we are in this market cycle?
- Well, so yesterday we laid out from our friend Steve Sosnick three keys to being a meme stock. One is you have a very passionate fan base following, which we know Reddit has. Another would be the rally that we see in the stock may be detached from fundamentals, which we referenced we had it.
Now we have short interests, so we can call Reddit a meme stock now. We just checked off our third box. But I think overall, yes, this is some of the sentiment you're starting to see among several of these names that we have on the board here.
You have Reddit up there. You have the Trump Media Company up there. GameStop actually falling largely on fundamentals today maybe, so maybe that's actually making a normal move. But Reddit and Trump Media sort of working together there.
And again, just moves we're seeing detached from fundamentals right now, so certainly not surprising to me to see someone come out with a short call on this stock right now. Again, we just don't know enough. We haven't even had their first earnings report since they've been a public company.
We don't have enough information here to see this valuation keep creeping higher. I think that's a fair stance to be at right now. Whether it grows in the future, up for debate. But for right now, it was quite the rally for the first couple of days of trading.
- Yeah, it's interesting. I mean, none of my friends use it, which is my favorite indicator. If no one I know is using it, then-- not that that means anything.
- Maddy we got to get you on a different sector of the internet.
- I know. It literally doesn't matter anymore because I'm not--
- You're saving a lot of your time.
- I'm not saying. I'll tell you that much. But always great. Thank you so much, Josh for joining us on that news as it's developing here.