Countdown to Destruction: Brutal Days Are Coming for Reddit Stock
What’s more important — thrills, or actual profits? This is a gut-check question that you need to answer if you’re thinking about investing in Reddit (NYSE:RDDT). The countdown has begun, and even if you’re a thrill seeker, you’d better sell your Reddit stock before an upcoming disastrous event takes place.
It won’t happen soon, but it’s coming. Besides, Reddit isn’t exactly the most fundamentally sound company you can risk your hard-earned capital on. Even as Reddit tries to jump on a popular tech bandwagon, the company still has to prove its financial viability.
Suddenly, Reddit Gets an AI Injection
The bandwagon I’m referring to, as you may have guessed, is artificial intelligence. It seems like every business is jumping headfirst into the AI trend whether it’s needed or not.
Per TechCrunch, Reddit is now stuffing its platform with AI features. An example would be an AI-powered language-translation feature for the Reddit app.
It’s fine for Reddit to be responsive to market trends. However, Reddit certainly isn’t a front-runner in the social-media AI wars. That title would probably go to Meta Platforms, which has already invested heavily in AI technology for its social-media platforms.
Meta Platforms has plenty of capital to burn on AI investments. Reddit doesn’t have the deep pockets that Meta Platforms has — not even close. Bear in mind, Reddit hasn’t recorded a full-year profit Reddit since the company first launched way back in 2005.
I’ll give a hat tip to fellow InvestorPlace contributor Joel Bagole, who reminded readers that Reddit “posted a net loss last year of $90.8 million” despite generating $804 million in revenue. So, before you go on a heroic meme-stock expedition, inspect Reddit’s questionable fundamentals.
Reddit and the Lockup-Period Expiration
It might be fine to trade Reddit stock for a quick flip. Holding the shares long-term will probably be hazardous to your financial health, however.
Think about this. Reddit’s initial public offering took place on March 21. The stock popped and then dropped after the IPO, but there could be a much deeper drop coming.
As CNBC pointed out, Reddit’s insiders are “forbidden from selling shares until the post-IPO lockup period expires 180 days after the offering.” We’re not there yet, but September will be here before you know it.
Even if Reddit’s insiders don’t all dump their shares at once, the lead-up to the lockup expiration could make investors nervous.
Chris MacDonald summed up this concern, warning, “Reddit encounters post-IPO risks as its 180-day share lockup expiration approaches, potentially causing stock volatility.” Hence, it’s wise just to stay away and sidestep this period of increasing uncertainty.
AI Trend-Hopping Won’t Save Reddit Stock
Reddit suddenly wants to infuse its app with AI features, but this isn’t innovating; it’s just following a trend. The company trails behind Meta Platforms, which can afford to spend much more capital on AI investments.
Meanwhile, Reddit still has to prove that it can end a year “in the black” (i.e., profitably). Moreover, long-term investors must brace themselves for the inevitable lockup-expiration event. Instead of exposing your portfolio to these hazards, I encourage you to sell Reddit stock if you own it, or just avoid it if you don’t.
On the date of publication, David Moadel 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.
