Last week brought the biggest trading debut of the year when Reddit (NYSE:RDDT) launched its initial public offering (IPO). Of course, after a failed attempt to go public in 2021, the social media company already had many eyes on its 2024 debut. When Reddit announced plans to reserve a portion of its new shares for platform users, though, it thrust the pending IPO into full focus. But speculation quickly rose that some retail investors were planning on turning the RDDT stock debut into a massive short squeeze.
Reddit enjoyed a successful trading debut, with high-profile institutional investors like Cathie Wood choosing to buy in. Days later, however, shares are falling while short interest in the newly minted stock rises. This suggests that a short squeeze has a chance. If that’s the case, investors should approach RDDT stock with caution.
Bears are Closing in on RDDT Stock
Despite soaring on its first day as a public company, Reddit hasn’t been able to sustain the momentum. Shares are down 12% as of this writing. A downward move like this can be commonplace for recent post-IPO stocks, especially ones with Reddit-like hype. But short sellers don’t typically close in on a new stock so quickly unless they have reason to believe it will continue to fall. As Quartz reports:
“Some 7% of Reddit’s free share float (or more) has been sold short so far, according to an estimate from the analytics company Ortex cited by Reuters. That’s something the social platform was worried would happen, noting in its prospectus that retail traders in its subreddits (and particularly on r/WallStreetBets) could cause “extreme volatility” in Reddit’s share price. Those Redditors had already signaled in posts that they were planning to short the stock.”
This suggests that Reddit’s concerns regarding its users betting against the stock were well-founded. However, there is ample reason to believe that RDDT stock is destined to keep falling. Hedgeye analyst Andrew Freedman recently issued a warning that shares have soared too high amid the debut. The analyst predicts that RDDT could easily end up plunging by as much as 50%.
A Rough Road Ahead
If that happens — or if shares fall by even close to that amount — RDDT stock may have a tough time rebounding. Prior to the debut, Alpha Cubed Investments CEO Todd Walsh spoke to InvestorPlace about the potential risks of buying into the Reddit IPO. Walsh suggested that investors should approach it with caution. “It might make sense to stand back and watch to see where and how the dust settles,” he speculated.
A few days after the trading debut, we know that short sellers are lining up to bet against RDDT stock, clearly seeing it as a potential loser. After all, they know that meme stock status hasn’t saved companies like Gamestop (NYSE:GME) or AMC Entertainment (NYSE:AMC). While the r/WallStreetBets crowd may be mixed on RDDT stock, actual Wall Street bets from short sellers are not in the company’s favor.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
