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Why Reddit Stock Crashed

When a company lists its shares through an initial public offering, it usually does so when the stock market is overly bullish. Reddit (RDDT) priced its IPO at $34, raising $748 million last week. The stock traded as high as $74.90 before ending the week at $49.32.

Why did RDDT stock crash for three straight days after a strong opening?

The media might believe that Hedgeye’s initiated short report on the firm started the panic. However, insiders and premium members invited to buy the stock at $34 sold the stock on its way up. Chief Executive Officer Steve Huffman sold half his shares or 500,000 units. The market did not have enough demand to absorb the massive selling volume.

Last week, GameStop (GME) and AMC Entertainment (AMC), two of the original meme stocks born from Reddit subgroups, also lost value. The former posted weak holiday sales while the latter raised cash by selling shares. Fundamentals will catch up to Reddit. The company will not post a profit any time soon.

Once market sentiment shifts from excessive bullishness to panic, speculators will dump companies that do not earn a profit. Reddit stock has a high risk of falling steadily in the coming weeks and months.

Your Takeaway

Reddit is effectively an open message board whose user base may not lead to sales generation for advertisers. Meta Platforms (META), one of the biggest social media sites, is now under scrutiny. Advertisers are suing it for inflating ad viewership. The lawsuit seeks $7 billion.

Doubt on ad effectiveness on Facebook will hurt Reddit’s valuation.