Behind every meme stock lies a bloody long short battle, and the latest "American Tieba" Reddit is no exception.
After going public last Thursday, Reddit's stock price continued to rise, but this triumph was abruptly interrupted on Wednesday. As of Tuesday, Reddit's stock price has risen by over 90%, with a closing high of $65.11. However, on Wednesday, the stock fell 11%, reaching its lowest closing price level since last Friday.
And this sharp drop seems to be closely related to a bearish report from a research institution. According to a report released by Hedgeye, Reddit's stock price has been severely overvalued, and its trading price should be closer to its IPO price of $34, which means the stock price needs to fall more than 40% from Wednesday's closing price.
According to preliminary estimates from Ortex, an analysis company, approximately 2.15 million shares of Reddit stock have been loaned out, representing at least 7.1% of Reddit's freely tradable shares being sold short. Considering that the stock has been listed for less than a week, the short selling volume of this scale represents a very pessimistic view of the stock's prospects by some investors.
Meanwhile, on Monday of this week, Nasdaq listed options trading on Reddit. Unlike the enthusiasm of the bulls in the previous two days, the trading of Reddit option contracts on Wednesday showed signs of bears taking the upper hand.
According to Trade Alert data, the expected futures trading volume for the stock on Wednesday was 82000 contracts, lower than Tuesday's 131000 contracts, and market sentiment tends to be bearish. This shows that the initial enthusiasm for Reddit has cooled down since its launch.
Undervalued fundamentals
Hedgeye analyst Andrew Freedman pointed out that he had already decided to short Reddit before its stock issuance, but initially did not short because of the high volatility.
He is waiting for Reddit's Q1 2024 performance report to be released at the end of May and hopes to see Reddit's fundamental momentum from this first post IPO report, but he expects the report to indicate some weak signals.
He further emphasized that more attention should be paid to the development of Reddit in the second half of 2024 and the first half of 2025. The growth of Reddit's users and revenue may rapidly slow down, leading to a further decline in the stock price.
Nevertheless, the release of Reddit is still considered a success. It is the fourth largest IPO in the US stock market this year, which is undoubtedly a very favorable signal for the quiet IPO market in recent years.