Reddit Stock May Be More Than a Meme, But It’s Still Not a Buy.

Stocks to sell

Reddit (NYSE:RDDT) went public less than a month ago, but even in this short span of time, Reddit stock has become one of the most talked-about stocks out there. Based on traditional valuation metrics, RDDT is richly priced. Upon closer inspection, shares may not be too expensive, The company has multiple catalysts that may drive profitability.

However, that’s not to say that shares are likely to move higher from here. Much less, are worthy of a buy. For now, the stock may be able to hold steady at or near $46 per share, but a move to lower prices in the months ahead remains very likely.

Reddit Stock and its Post-IPO Surge

After decades of being privately held, Reddit became a publicly traded company for the first time on March 21, when it held an initial public offering at $34 per share. Right out of the gate, RDDT soared in price, closing 48% higher on its first day of trading.

Then, Reddit stock became the subject of “meme mania.” Between March 22 and March 26, the stock soared from just under $50 per share, to as much as $74.90 per share.

However, as quickly as it started, the “meme wave” came to an end. Shares experienced sharp declines during the last two trading days of March.

So far in April, Reddit has traded sideways. RDDT has found support at around $45 per share, and resistance at $50 per share. With the speculative frenzy waning, the speculators are leaving the scene.

Investors focused more on fundamentals are assessing the opportunities and risks at hand.

Again, RDDT is not as pricey as its current forward multiple of 384.5 may suggest. There are also several catalysts in play that could result in dramatically improved fiscal results. Unfortunately, not even this may save the day for shares.

More Than a Meme Stock

Reddit stock may be seen as a short-term meme play, considering its initial trading and the impact of Reddit’s platform on meme stocks in 2021. RDDT’s stock trading is not solely based on hope and hype.

For one, the price-to-earnings ratio is misleading. Forecasts call for Reddit’s annual earnings to increase from 12 cents to 63 cents per share between 2024 and 2025.

Also, as discussed in Barron’s last month, shortly after the IPO, Reddit has several growth catalysts on tap. Alongside catalysts that you may expect, like improved ad monetization, the company is also pursuing other revenue streams.

Namely, efforts to generate revenue from licensing its vast library of posts for AI large language model training purposes.

The company may also eventually launch an official marketplace feature, in order to monetize the commercial and peer-to-peer transactions conducted unofficially through the platform. Yet while RDDT may be more than just a meme stock, that doesn’t make it a buy.

Bottom Line: Stick to the Sidelines for Now

There are two reasons these potential catalysts will not drive a rebound. First, although the a catalysts may eventually boost Reddit’s profitability, at best this may only sustain RDDT’s current valuation.

In other words, today’s share price is fully reflective of the company’s long-term potential. Second, even if something like valuation concerns doesn’t knock RDDT lower from here, there is an event that is likely to do so.

More than 180 days after the IPO, the lockup provisions preventing both company insiders and large shareholders like Advance Publications and OpenAI co-founder Sam Altman from selling will expire. Insider selling could heavily pressure the stock later this year.

While you may want to take a second look if Reddit stock falls sharply from here, stick to the sidelines for now. Wait for the lockup expiration and/or for shares to fall to a discounted price.

On the date of publication, Thomas Niel 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.comPublishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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