Reddit Tumbles After Hedgeye Names It a Short Idea and Sees 50% Slump

Carmen Reinicke, Bloomberg News

, Bloomberg

(Bloomberg) -- Reddit Inc. shares notched their largest one-day drop since the social-media company’s trading debut after Hedgeye Risk Management released a report adding it as a short idea and saying it should fall about 50%.

The stock slipped 11% Wednesday to end the trading session at $57.75 a share, its lowest closing level since March 22. Reddit shares had been on a tear since the company’s March 21 initial public offering, gaining more than 90% to an all-time high close of $65.11 on Tuesday.

But according to Hedgeye, the stock is “grossly overvalued” and should trade closer to its IPO price of $34 — reflecting about 50% downside from Tuesday’s close.

Reddit declined to comment.

Hedgeye analyst Andrew Freedman wrote that the firm had Reddit on its “short bench” heading into the IPO, but believed it would be too volatile to actively short in the early days of trading.

“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,” Freedman added.

Still, the warm welcome the public markets gave Reddit shows investor enthusiasm for all things artificial intelligence, which was at the center of the company’s IPO. Reddit’s public offering is the fourth largest on a US exchange in 2024 and a positive signal for technology companies that put their offering plans on hold in recent years.

Read more: Reddit, Galderma Fire IPO Starting Gun. Now Investors Want More

The company is expected to report its first quarter 2024 results at the end of May. Freedman expects that its first report as a public company will show “fundamental momentum,” but sees the possibility for weakness in upcoming reports.

“Our attention is focused on 2H24 and 1H25 where we expect a rapid deceleration in user and revenue growth,” Freedman said.

(Updates stock moves at market close. A previous update added company response in fourth paragraph.)