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Reddit Tumbles After Hedgeye Names It a Short Idea and Sees 50% Slump

Reddit Tumbles After Hedgeye Names It a Short Idea and Sees 50% Slump
A trader works during the Reddit Inc. initial public offering (IPO) on the floor of the New York Stock Exchange (NYSE) in New York, US, on Thursday, March 21, 2024. Reddit Inc. and its selling shareholders raised $748 million, pricing shares in an initial public offering at the top of a marketed range, the second big tech listing in as many days. Photographer: Michael Nagle/Bloomberg

Reddit Inc. shares are on track to notch their largest one-day drop since the social media company’s trading debut after Hedgeye Risk Management released a report adding it as a short idea and saying it should trade about 50% below current levels. 

The stock slipped as much as 15% in intraday trading on Wednesday, to its lowest level since March 22. Reddit shares have been on a tear since the company’s March 21 initial public offering, where it surged 48% in its first day of trading after pricing at $34 per share.

“Heading into the IPO, we put RDDT on the short bench, reflecting our belief that the stock is a fundamental short but that the days immediately following the IPO would likely be volatile and not the proper time to make it an active short,” analyst Andrew Freedman wrote.

Reddit Set for Worst Drop Since IPO | Shares slip as Hedgeye calls it a short idea

Reddit did not immediately respond to a Bloomberg News request for comment.

In its first few days of trading, Reddit shares gained more than 90% to an all-time high close of $65.11 on Tuesday. According to Hedgeye, the stock is “grossly overvalued” and should trade closer to its IPO price of $34. That reflects about 50% downside from Tuesday’s close.

“The deal was oversubscribed, the float small, valuation range looked reasonable, and they timed the IPO coincident with easy comparisons where the company is going to post accelerating revenue and user growth the first quarter out of the gate as a public company,” Freedman added.

Still, the warm welcome the public markets gave Reddit shows investor enthusiasm for all things artificial intelligence, which was at the center of the company’s IPO. Reddit’s public offering is the fourth largest on a US exchange in 2024 and a positive signal for technology companies that put their offering plans on hold in recent years.

Read more: Reddit, Galderma Fire IPO Starting Gun. Now Investors Want More

The company is expected to report its first quarter 2024 results at the end of May. Freedman expects that its first report as a public company will show “fundamental momentum,” but sees the possibility for weakness in upcoming reports.

“Our attention is focused on 2H24 and 1H25 where we expect a rapid deceleration in user and revenue growth,” Freedman said.

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