Beware the Reddit Stock Bubble: Why This Overhyped IPO Is Set to Burst

Investors circling newly public social media company Reddit (NYSE:RDDT) should hold off on taking a position in the company.Now that the hype surrounding Reddit’s initial public offering (IPO) has died down, Reddit stock has fallen substantially since its market debut in March.

After peaking at $74.90 per share, the stock has dropped 45% to now trade at $40. The share price could pullback further if Reddit’s first earnings report on May 7 is awash in red ink. Analyst and investors will be watching the earnings print carefully to see that Reddit’s losses are improving and the company that runs online message boards is on a path to profitability.

Still Unprofitable

Expectations were high for Reddit’s IPO. The share sale ended up being five times oversubscribed amid strong investor demand. Reddit stock was one of the largest technology IPOs of the past two years and the first major social media company to go public since Pinterest (NYSE:PINS) in 2019. In the end, Reddit came to market with a valuation of $6.5 billion. While big, the valuation was down substantially from $10 billion in a previous funding round that was carried out during the 2021 bull market.

It now looks as though many investors took the money and ran shortly after Reddit went public. Early analyst ratings on the stock have not been enthusiastic. The current consensus among five analysts who have offered price targets on RDDT stock is a “strong sell” rating. The main issue seems to be that, although it has been in business since 2005, Reddit remains unprofitable. While Reddit’s revenue increased 20% in 2023 to $804 million, the company posted a net loss last year of $90.8 million.

Questionable Business Model

Other analysts question Reddit’s business model. Like most social media companies, Reddit relies on online advertising for revenue. That makes the company vulnerable to economic cycles and the whims of companies when it comes to advertising. At the same time, Reddit is dependent on an army of volunteers for content on its various message boards. Reddit’s online message boards, or forums, facilitate conversations on most any topic, from politics and investing to recipe exchanges and celebrity gossip.

Of course, the company is best known for its infamous WallStreetBets forum that came to prominence during the meme stock craze of early 2021. Retail investors continue to discuss various stocks and trades on WallStreetBets, but none of the company’s other online forums are nearly as popular. Reddit claims to have a total of 73 million daily active users on its platform, according to its IPO regulatory filings. Finding ways to monetize those users and turn a profit will be key for Reddit’s future and its stock.

Don’t Buy Reddit Stock

Other recent tech IPOs have fared better than Reddit. Semiconductor company Astera Labs (NASDAQ:ALAB), for example, went public the same week as Reddit and its share price is up 4% since its market debut. Looking ahead, earnings will be key for Reddit with the upcoming first print likely to be a make-or-break moment for the stock. As such, investors who are interested in taking a position in Reddit should hold off until the company provides a clearer picture of its finances and whether profitability is achievable. Right now, RDDT stock is not a buy.

On the date of publication, Joel Baglole 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.