Reddit offered the public, including its thousands of sub-communities, stock options on March 21 as it made its initial public offering this year. The stock was priced at $34 per share but rose to $50.44 on the first day. CWEB analysts believe the stock price is underweight and that the stock has been overvalued. Market optimism for the stock might be short-lived for several reasons, as mentioned below.
When Reddit opened its public offering, there was a lot of initial enthusiasm, as public offerings have declined in recent years. However, the company’s current market valuation of 8 billion does raise a few red flags.
Reddit offered 22 million shares in its IPO. The social media platform sold 15.30 million shares, while existing shareholders who participated in initial investment rounds or founded the company sold 6.70 million shares, diluting their stake as it went public.
CEO Reed Hoffman sold 500,000 shares, and CFO Jen Wong sold 514,000 shares. The company was founded in 2005 and is still operating at a loss after almost two decades. When top management dilutes such high stakes, it does not bode well for investor confidence.
Reddit still has 73 million outstanding convertible preferred shares worth $1.85 billion. Although there is no indication of a one-to-one conversion, the stock value will automatically fall when the shares are converted. This reiterates that the stock has been overvalued due to market enthusiasm and a vast web fan base.
As we reported, one subreddit group, WallStreetBets, was responsible for pumping stock. Many small-time investors, including GameStop, lost money to meme stocks.
On the plus side, Reddit saw increased ad revenue and narrowed losses on its site and app. It gained $804 million in 2023 compared to $666.70 in 2022, narrowing the loss before income tax from $157.90 to $87 million.
The company needs to become profitable for its stock to have value, but Reddit is not the only unprofitable publicly traded company with losses in the US. These companies continue to survive and have an elevated stock price due to several factors.
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