Is Reddit stock headed for disaster?

Reddit's (RDDT:US) stock is currently plummeting, tanking nearly 25 percent in just two days, as reported by CNBC.

The social media firm went public last week with an IPO price of $34, initially soaring to around $65.

However, this week saw a decline as shares started slipping, triggered by Hedgeye Risk Management's report labelling the stock as "grossly overvalued," predicting a potential 50 percent drop closer to its original price. The recent decrease, now around $49 as of 1^st Apr, underscores an anticipated correction, where the initial investor excitement collided with a sobering reality.

Reddit's IPO was heavily focused on AI, aiming to capitalise on the tech hype. Yet, despite its 20-year history, the company has not managed to turn a profit. In 2023 alone, the platform incurred a significant loss of $90.8 million.

Meanwhile, the controversial CEO Steve Huffman awarded himself an eyebrow-raising $193 million compensation package, surpassing the combined compensations of Meta, Pinterest, and Snap's CEOs.

Reddit's turbulent debut on Wall Street isn't much of a shock. With a murky path to profitability, whether with or without AI, the company isn't likely to suddenly shed its financially unstable history.

To industry analysts, Reddit's choice of launching in the latter half of March seems calculated, potentially hinting at challenging quarters ahead.

"The deal was oversubscribed, with a small float and a reasonable valuation range, and they timed the IPO alongside easy comparisons, where the company is expected to show increasing revenue and user growth in its first quarter as a public entity," Hedgeye analyst Andrew Freedman wrote in a report.

However, the real test lies ahead. As the first quarter of the year progresses, all eyes are on Reddit to observe if it can execute its strategies to draw in new users and boost revenue.

Was the initial surge in Reddit's stock price post-IPO merely a short-lived burst of excitement? Or does last week's decline foreshadow further challenges?

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