Want to buy a piece of the Reddit? You better think about what the WallStreetBets subreddit could do to your investment.
That’s according to the social-media platform itself.
Three years after Reddit was the epicenter of a trading frenzy that shot meme stocks to the moon and back, it is warning would-be investors that a repeat phenomenon could shake its own share price, according to its IPO papers filed Thursday with the Securities and Exchange Commission.
By law, companies seeking an initial public offering have to give a rundown of the risk factors they think could dent their stock. But Reddit’s nod to the 2021 mania that took place on its WallStreetBets forum is a distinct one.
In its publicly filed IPO papers, Reddit noted the “extreme volatility” for companies like GameStop Corp.
GME,
and AMC Entertainment Holdings Inc.
AMC,
during the meme-stock craze.
Reddit said those stocks’ swings and spikes were linked “in part, to strong and atypical retail-investor interest, including as may be expressed on financial-trading and other social-media sites and online forums such as r/ wallstreetbets, one of our subreddits.”
GameStop shares rocketed from around $4 per share in early December 2020 to an all-time intraday high of $483 on Jan. 28, 2021. The stock opened Friday at $13.30.
In its IPO filing, Reddit said that with the awareness of its platform, the popularity of WallStreetBets and direct access to shares, “the market price and trading volume of our Class A common stock could experience extreme volatility for reasons unrelated to our underlying business or macroeconomic or industry fundamentals.”
That prospect “could cause you to lose all or part of your investment if you are unable to sell your shares at or above the initial offering price.”
Reddit wants to trade under the RDDT ticker. Its filing didn’t disclose the number of shares being offered, or their proposed price. The company said it would offer some shares to certain Reddit users and moderators.
The risk-factor shout-out earned cheers and jeers on WallStreetBets, the salty subreddit with 15 million members.
“Look ma we made it,” one Redditor said.
“Short it,” another wrote.
To be sure, buying a piece of any company going public comes with downside risks.
Consider Uber Technologies Inc.
UBER,
which offered its shares at $45 during its May 2019 IPO, which was the biggest public debut for a U.S.-based company since Facebook in 2012.
Uber’s share price soon decelerated before a swing higher that started in late 2020. After another dip and another turn higher, the ride-share company is now joining the Dow Jones Transportation Average
DJT.
It opened at $78.50 on Friday.
But is WallStreetBets actually an issue for potential Reddit investors?
In some ways, naming WallStreetBets as a risk is an exercise in covering all the bases, said James Angel, a professor at Georgetown University’s McDonough School of Business.
“What lawyers do, they do their best to create a parade of horribles of every possible thing to go wrong,” Angel told MarketWatch. “If they leave something out and something does go wrong, everybody gets sued.”
With Reddit’s risk factors, “in plain English, what they are saying is, ‘We could be a meme stock, so that means our stock could be really volatile,’” Angel said.
While that could be the case, investing is a long game, and there are many more factors other than the chance of short-term swings that people should weigh when considering whether to invest in a company like Reddit, Angel said.
Reddit declined to elaborate on its filing because companies aren’t allowed to publicly comment on their IPOs before they start trading.
WallStreetBets users are “already rallying around a possible memefication of RDDT, with posts on the IPO in [WallStreetBets] seeing heavy interest in possibly shorting the stock,” said Thomas Westwater, an options strategist at tastylive, a streaming platform geared toward options traders.
The “short it” comment on WallStreetBets had received more than 2,000 upvotes as of midday Friday, he noted.
“While some are brushing aside the potential risk factor, it would go against the adage that ‘those who do not learn history are doomed to repeat it,’” Westwater said.
Reddit’s own “memefication” could play into short-term price moves for the stock, but Westwater said the Reddit IPO “will be at a much higher valuation than where the ‘meme’ stocks started, and without options listed to start, it will be harder to fuel the same sort of squeeze.”
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