Reddit Inc’s IPO shocked many when it hit the top of its marketed range, netting US$748 million for the social media company in the initial raising.
The stock then shot up 48% to $50.44 per share and continued that momentum to add another 8.8% today, bringing the share price to US$65.11.
Despite the hype, analysts are already urging caution, pointing to the company’s history of negative profits and 7.6x price-to-revenue ratio.
Research from Finder.com supports the reticence – an analysis of 20 of the most hyped IPOs in the UK and US between 2018 and 2022 found 12/20 experienced a stock price drop after the first week of trading, an average decline of 10.2%.
“As many predicted, Reddit’s share price started very strongly as one of the most hyped IPOs of the last few years got underway,” Finder.com investing expert George Sweeney DipFA said.
“Whilst there is a chance this continues due to it being so closely tied to the ‘meme stock’ phenomenon it helped facilitate back in 2021, investors should be very careful.
“In fact, there’s even plenty of chatter on Reddit itself from users planning to short the stock and cash in on the surrounding buzz.”
Popular IPOs lose out after first year
While some stocks were able to maintain momentum beyond the first week, 14 out of 20 had dropped by the end of the first year of trading, seeing an average decline of 41%.
Funding Circle in the UK lost a whopping 78.7% in the first year, trading platform Robinhood (NASDAQ:HOOD) shed 76.3% and luxury sports car manufacturer Aston Martin lost 74.7%.
That’s not to say all popular stocks fall off inside 12 months – Snowflake, a data computer company, achieved a 32.2% rise after its first year, while FRP Advisory Group gained 30.5% and Trainline rose 27.8%.
That said, the average change in stock price across all 20 companies, including those who managed positive growth, was -21.7% after that first year.
“The difficulty around investing at the time of an IPO is that we’ve seen time and time again, newly publicly listed companies get off to a high-flying start, but the shine quickly fades,” Sweeney continued.
“There’s usually an atmosphere of FOMO, yet the investors who are patient often find there’s a better time to invest at a cheaper price in the weeks and months following a high-profile IPO.
“Short-term traders may be interested in the volatile activity but long-term investors usually get a more positive result by assessing the lay of the land and picking up shares once the dust settles.”