Will the Reddit IPO Be the Mother of All Short Squeezes?


  • The Reddit initial public offering (IPO) is expected to drop this year.
  • But some retail investors aren’t happy and are plotting against it.
  • The case for a short squeeze when the stock debuts is gaining traction.
Reddit IPO - Will the Reddit IPO Be the Mother of All Short Squeezes?

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For the past two weeks, investors have been waiting for what promises to be the year’s biggest initial public offering (IPO). On Feb. 22, 2024, the popular social media forum Reddit filed a prospectus with the U.S. Securities and Exchange Commission (SEC) seeking to go public. This caught the attention of both institutional and retail investors for good reason. It promises to be by far the highest-profile trading debut so far this year. However, not everyone is excited about the Reddit IPO. In fact, the same crowd known for betting on struggling companies to spite Wall Street is threatening to short the newly minted RDDT stock. This is a sharp deviation from their typical investing strategy.

Does this mean that the Reddit IPO is doomed to fail before it even launches? Not necessarily. But this interesting turn of events is worth a closer look. It shows that the r/WallStreetBets crowd may finally be switching gears.

Is the Reddit IPO Short Squeeze Coming?

If you think it’s out of character for retail investors to bet against the Reddit IPO, you’re right. During the GameStop (NYSE:GME) short squeeze of 2021, the r/WallStreetBets crowd rejoiced at the notion of being able to harm short sellers. Since then, they haven’t been shy about levying criticisms against the hedge funds that bet against struggling stocks. But now, the heroes that no one asked for seem to be turning into the enemy they fought so hard to destroy. As Bloomberg reports:

“In the days after the social-media company filed for an IPO, thousands of members of the WallStreetBets forum — which boasts around 15 million users and helped popularize meme stocks like GameStop Corp. — voted to boost a forum post about shorting the company, a sharp reversal of their typically bullish ways. Their avowed reasons varied from the company’s lack of profitability to competitive concerns, and mostly centered on spite.”

It makes sense that spite would play a key role in the bearish case against Reddit being made by retail investors. After all, these are the same people who have made substantial bets on risky companies. This list includes struggling theater chain AMC Entertainment (NYSE:AMC) and unstable penny stock Meta Materials (NASDAQ:MMAT).

Retail traders have refused to sell, no matter how much shares tank, if it means the possibility of hurting Wall Street. When their meme stock investments fail as they often do, these investors have been quick to hurl unsubstantiated accusations of “naked shorting” at institutional investors. As InvestorPlace‘s Eddie Pan reports, meme stock trading is often an effective way to lose money. But these investors may finally be tired of losing.

As noted by Bloomberg, many Reddit users have expressed concerns regarding the company’s long-term profitability. Benzinga provides a further breakdown of their reasoning. As the outlet states: “The fact that Reddit has never turned a profit raises doubts about the company’s financial sustainability.”

That sounds more like the type of perspective that you’d hear from a Wall Street analyst, not a meme stock trader. But it suggests that we may actually see a successful short squeeze take place when the Reddit IPO makes its debut.

What Comes Next

It’s clear that when it comes to the Reddit IPO, the platform’s users are highly polarized. Whether or not the squeeze takes place will likely come down to which side wins out.

If the company’s owners want to go public, they clearly aren’t overly concerned with its financial viability. But if enough users are too concerned with its questionable growth prospects, they will likely see a short play as the best way to profit. As of now, it’s impossible to say for sure how much they can squeeze it for. Investors should keep monitoring Reddit to see what the r/WallStreetBets crowd is leaning toward.

On the date of publication, Samuel O’Brient did not have (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.

Samuel O’Brient is a Reporter for InvestorPlace, where his work focuses primarily on financial markets, global economic trends, and public policy. O’Brient writes a weekly column on recent political news that investors should be following.

Article printed from InvestorPlace Media, https://investorplace.com/2024/03/will-the-reddit-ipo-be-the-mother-of-all-short-squeezes/.

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