Reddit Stock: Insider Selling Raises Pump-and-Dump Possibilities

Did you ever get the feeling you’ve been tricked? I posited that Reddit (NYSE:RDDT) shares could rally like Meta Platforms (NASDAQ:META) stock did. Now, I’m having serious doubts and can’t bring myself to recommend investing in Reddit stock right now.

I’m not denying that Reddit’s debut for public trading could still be 2024’s most important initial public offering. At the same time, it’s too risky to hold more than a few shares of RDDT stock. So, don’t go overboard and, as always, be sure to have an exit strategy in place.

Reddit Stock: Was This a Pump-and-Dump?

First things first: I’m not directly accusing Reddit’s management of perpetuating a pump-and-dump scheme. However, it’s quite interesting that at least two insiders dumped large quantities of Reddit shares soon after the company’s IPO.

Here’s the timeline. Reddit started trading under the symbol RDDT on the New York Stock Exchange on March 21. For what it’s worth, InvestorPlace contributor Chris MacDonald warned that Reddit’s insiders would “be able to sell stock immediately following the IPO.”

Then, on March 25, Reddit Chief Financial Officer Andrew Vollero reportedly sold 71,765 shares of the company. That transaction was worth slightly more than $2.3 million.

That same day, Reddit President and CEO Steve Huffman reportedly sold 500,000 shares of his company. Stunningly, that transaction was valued at over $16 million.

I’ll let you draw whatever conclusions you’d like from this information. Personally, I imagine that confident Reddit insiders would be buyers, not sellers.

Could RDDT Stock Drop 50%?

For a while, investors shouldn’t expect Reddit’s fundamentals to drive movements in Reddit stock. In the short term, meme-stock traders might move the Reddit share price higher, while short sellers will push it down.

Because of the anticipated near-term volatility, it’s difficult to attach a confident price target to RDDT stock.

Some analysts have offered their opinions, though. For example, New Street analysts reportedly envision the Reddit share price landing at $54.

A more notable prediction, however, came from Hedgeye Risk Management analysts.

They see Reddit stock collapsing to $34, which was around 50% below the share price when the Hedgeye analysts issued their price target.

The firm considered RDDT stock to be “grossly overvalued.” That may or may not be the case, though it’s challenging to assign a fair value to a highly volatile stock so soon after its public debut.

Furthermore, Hedgeye analyst Andrew Freedman almost seemed disgusted by the early hype surrounding the Reddit IPO.

“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,” he wrote.

You might agree with Freedman’s assessment, or you may choose to disagree. Either way, it will probably be a few weeks or even months before the market achieves “price discovery” and figures out an appropriate price range for Reddit stock.

Reddit Stock: Stay Small, or Don’t Stay at All

The Reddit share price could fall 50%, or it could double or triple. For the time being, keep tabs on Reddit’s fundamentals but also pay close attention to short-selling activity.

Moreover, it’s noteworthy that a couple of Reddit insiders dumped shares of the company soon after its IPO. Overall, Reddit stock is high-risk and high-reward, and if you choose to invest at all, be sure to keep your position size small.

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.