IPO expert warns Reddit stock may soon reflect fundamentals, ‘rather than hype’

Reddit Inc's (NYSE:RDDT) stock price fell over 7% Friday, a day after the social media platform made its long-awaited market debut.

Market participants have closely monitored the company's share sale to gauge investor interest in new stock offerings after a prolonged market freeze. According to IPO experts, the stock's performance in the coming weeks could significantly impact the IPO plans of other loss-making tech startups.

Reddit market debut

On its first day trading on the New York Stock Exchange, RDDT shares climbed 48%. While the social media platform is still loss-making, its performance on the first day of trading was positive, closing at over $50 per share.

Reddit’s IPO was priced at the top of its targeted range of $31 to $34 per share, with the company raising $748 million at a $6.4 billion valuation. 22 million shares of Reddit were sold by the company, and existing shareholders at $34 each.

Despite the positive first day, Reddit users themselves are still skeptical due to concerns about its lack of profitability and its performance over the long term.

However, David Kaufman, Partner and Co-Chair of Thompson Coburn’s Corporate and Securities Practice Group, told Investing.com that “although it seems like Reddit lacks a proven profit business model, its brand name may prove to [be] a winner in the stock market game.”

“Together with a lack of other exciting IPOs, or any IPOs at all, consumers may flock to grab onto this name brand in an effort to get some outsize one or two-day returns, as evidenced by the one-day pop,” Kaufman, a legal expert, added.

Kaufman also said the fact that Reddit disclosed “some sort of AI deal with Google” in its prospectus doesn’t hurt due to it being perceived as some sort of “AI- play.”

Even so, “as the smart money begins to dig deeper into the story, I would expect the stock price to better reflect its fundamentals, rather than its hype,” he added.

Cathie Wood’s ARK buys stock

However, one well-known investor is positive on the stock, with ARK Invest purchasing almost 10,000 shares of the social media platform on its debut.

Ark purchased 9,982 shares of Reddit through the ARK Next Generation Internet ETF and ARK Fintech Innovation ETF, representing an outlay of $503,492.

Despite the move from ARK, Kaufman believes it “seems like more of a consumer buy than a long-term play.”

Cathie Wood, like many others, “feels the need to own a household brand name in their portfolio,” added Kaufman. “ARKK doesn’t want to miss out on this popular plan. But let’s check in a quarter or two and see if it is still a hold.”

At the time of writing, Reddit’s market cap stood just below $7.5 billion.