As Reddit prepares to go public, the company acknowledges in its S-1 filing that the “meme stock” phenomena originating from r/WallStreetBets could present a risk to investors.
What is r/WallStreetBets
The subreddit r/WallStreetBets, boasting 15 million members, humorously describes itself as “like 4chan found a Bloomberg Terminal.” It gained notoriety for orchestrating a short squeeze on GameStop stock in 2021, a bold move that inflicted significant losses on hedge funds. The stock’s volatility, soaring over 600% in a matter of days, led to multiple trading halts. Retail traders attempted to replicate this with other heavily shorted stocks like AMC and Bed, Bath & Beyond, popularizing the concept of trading “meme stocks” with varied outcomes.
In its S-1 filing, Reddit stated, “Given the broad awareness and brand recognition of Reddit, including the popularity of r/wallstreetbets among retail investors, and the direct access by retail investors to broadly available trading platforms, 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, which 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.”
For Redditors who view retail investing as a form of internet amusement, Reddit’s IPO could be the ultimate meme. The company also disclosed in its IPO filing its plan to offer Reddit users and moderators the opportunity to purchase stock in its directed share program. This uncommon move would allow community members to buy stock at the IPO price, equivalent to institutional investors. Participants will be prioritized based on their karma, a metric measuring community contributions on Reddit.
However, another risk factor for investors is Reddit’s uncertainty regarding its future profitability. The company admits in the S-1 filing that it “may not be able to achieve or maintain profitability in the future.” Despite its significant role in internet culture, Reddit has yet to generate a profit, reporting a net loss of $90.8 million in 2023 and accumulating a total deficit of $716.6 million.