Many stock traders want to catch the next hot initial public offering (IPO) in hopes of a multi-bagger. If they get lucky, they’ll find the next Meta Platforms (NASDAQ:META). Don’t count on Reddit (NYSE:RDDT) becoming the next Meta, however. If Reddit stock gives you anything, it will only be headaches and harsh lessons.
I’ll admit that I got caught up in the excitement surrounding Reddit’s IPO. Soon afterward, however, I noticed some insider share selling and became wary of Reddit as an investable company. Now, I’m leaning bearish and wouldn’t touch Reddit stock with a 10-foot pole, and as we’ll see, I’m not the only commentator who’s waving the red flags.
Is Reddit ‘Grossly Overvalued’?
Sometimes, it’s challenging to assign a value to a new IPO stock. Nevertheless, analysts with Hedgeye Risk Management evidently weren’t afraid to call Reddit stock “grossly overvalued.”
Furthermore, the Hedgeye analysts feel that the stock should trade closer to $34, which was RDDT stock’s IPO price (though the stock actually debuted for public trading at $47). Looking ahead, Hedgeye analyst Andrew Freedman is “focused on 2H24 and 1H25 where we expect a rapid deceleration in user and revenue growth” for Reddit.
It’s difficult to assign any value to Reddit at all, since the company hasn’t delivered an annual profit since 2005, when the company first launched. Thus, Reddit has no earnings and no trailing price-to-earnings ratio. Perhaps there is another metric we can cite — but we’ll get to that in a moment.
The Hedgeye analysts aren’t the only Wall Street experts with concerns about Reddit. For example, Bernstein analysts led by Mark Shmulik asked, “[W]hat hope does Reddit have with their worst-in-class engagement, anonymous user base, and NSFW (Not Safe for Work) content?”
Reddit Won’t Be the Next Meta Platforms
If you’re waiting for Reddit to turn a profit soon, this might only be a pipe dream. “The longer term promises — grow the ad base, profits just around the corner and the dream of all the non-ad upside — are promises we’ve heard too many times,” the Hedgeye analysts warned.
The point here is that investors shouldn’t try to compare Reddit and Meta Platforms, even if they’re both social media companies.
On that topic, Public Ventures President and Chief Market Strategist Lou Basenese pointed out “worlds of differences” between Meta and Reddit. He observed “3 billion active users [for Meta Platforms]. And under 100 million [for Reddit]. Wildly profitable [Meta], no profits [Reddit].”
Moreover, Basenese cited Reddit’s price-to-sales ratio (trailing, I presume), since he can’t use a trailing P/E ratio for an unprofitable company. He stated that Reddit is trading at “like a nine times price to sales ratio, which is on par with Meta.”
A gigantic, profitable Magnificent Seven member like Meta Platforms might be able to justify a P/S ratio of 9x. With Reddit, however, it’s a different story. Again, as Basenese noted, Meta Platforms is highly profitable and has a superior active user base.
Reddit Stock: Don’t Catch a Case of IPO Fever
Don’t get the wrong idea here. Certainly, IPO stocks can be exciting and profitable. After the rise and fall of Reddit stock, though, it’s hard to build a compelling bullish argument.
It’s a shame, as I once had high hopes and thought that Reddit had “next Meta” potential. After carefully comparing Reddit and Meta Platforms, however, I can now see “worlds of differences.”
It’s not a good time to buy Reddit stock. And if you bought Reddit shares and have any profits, it’s wise to sell the stock now.
On the date of publication, David Moadel 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.