Why Reddit's IPO could offer an 'unprecedented' twist in meme-stock saga

By James Rogers

Reddit played an important part in the meme-stock frenzy, but could become a meme stock in its own right

Reddit's looming initial public offering marks an extraordinary scenario: A company that played a part in the meme-stock phenomenon is sparking meme chatter in its own right.

"This is an unprecedented situation, absolutely," Don Montanaro, president of retail brokerage Firstrade, told MarketWatch. "The meme-stock phenomenon has played out with stocks that were already out and listed for some time. Here we have the debate and the possibility of a stock being a meme stock before it's even public."

The Reddit IPO certainly offers a twist in the meme-stock saga. Reddit is home to the WallStreetBets subreddit, which played an important role in the meme-stock frenzy of 2021 that sent the stocks of AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) skyrocketing.

Related: Reddit's offering marks return of 'junk stock IPO,' New Constructs says

In its S-1 filing, Reddit cited the popularity of WallStreetBets among retail investors as a risk to its stock price, which it said could experience "extreme volatility" for reasons unrelated to the company's "underlying business or macroeconomic or industry fundamentals." Effectively, this is an acknowledgment that it could become a meme stock.

Reddit is also inviting users and moderators who have contributed to the social-media platform to buy shares in its IPO. Users and moderators who created an account on or before Jan. 1, 2024, and are "in good standing" are potentially eligible for the directed share program, the company said in its S-1 filing

The platform's unique role in the meme-stock world and its decision to open the offering to users and moderators make the IPO particularly noteworthy, according to Montanaro. "The conversation, tension, that's all going on out in the daylight, is fascinating," he said. "It's another sign that retail investors truly have a seat at the table now and need to be paid their due attention by public companies."

Related: Reddit's IPO filing names WallStreetBets' 'popularity' as risk to stock price

The stock will trade under the symbol RDDT on the New York Stock Exchange and its public debut is expected sometime in March.

But Montanaro was keen to dispel the notion that the stock could be shorted in the immediate aftermath of its IPO. "I am not sure that people understand how hard it would be to take a short position in the stock," he said. "That's partly a function of regulation and how shorting works- each brokerage firm needs to be able to build up an inventory in a stock before they are able to lend it out"

He also thinks the Reddit IPO will be closely watched by Google parent Alphabet Inc. (GOOGL) (GOOG). "The most keen observers of what goes on with this stock have got to be the guys at Google - we have to talk about spinning off YouTube at some point," he said. "I think that Google will have their eyes peeled on this market action."

Related: Reddit publicly files IPO papers, detailing plans to license data, sell more ads and grow its 'user economy'

Earlier this week independent equity-research firm New Constructs warned investors to avoid Reddit's IPO. "Reddit's IPO marks the return of the junk IPO," New Constructs CEO David Trainer wrote in a note. "We think the company may never monetize its platform without angering its users, and the entire premise of Reddit is user-generated content. This business model is inescapably built on a catch-22: Make money or please users."

-James Rogers

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03-09-24 0835ET

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