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Reddit share price dumps to opening levels following euphoria

Reddit API costs may increase

Last Thursday, the public was able to start buying shares in Reddit, the popular social media platform. Shares opened on the day at about $47 each before flying past $70 on Tuesday.

Since reaching north of $70, the market seems to have sobered up a bit with the price tumbling back down to $49.32 at the close on Thursday. Many people had anticipated this and will have shorted the stock while the price was high. Shorting a stock just means that an investor increases their money when a stock’s price goes down, it's a way of betting against a stock.

Trying to determine the fair value of Reddit’s shares right now is pretty difficult, one method of valuing a stock’s price is by finding the Graham Number but this requires a company’s earnings per share to be positive, unfortunately for Reddit, it has never reported positive earnings meaning it is losing money and its value can't be ascertained by this method.

As a new stock, some popular technical indicators like RSI also do not show any information about the stock on the daily charts. The RSI, or relative strength index, can help identify where a stock is overbought or oversold but without this information it’s a bit trickier to predict where the price is going next.

One aspect that investors and traders look for is whether insiders are selling or buying a company’s shares as this can indicate if they think their company is over or undervalued. CNBC notes that CEO Steve Huffman sold 500,000 of his shares and Jennifer Wong, the company’s Chief Operating Officer, sold 514,000 shares while holding 1.4 million more shares. The CEO also keeps hold of some of his shares.

For those that don’t use Reddit, the website is free to use. There are extra items that you can pay for on the platform like avatar outfits but these aren’t necessary to use the platform.

The company also shows advertisements in user’s feeds which helps the company make money. Despite this, the company is loss-making and unless it figures out a way to turn a profit then it could be difficult justifying the current price of the stock.

With the Graham Number formula, which focuses on track record rather than future prospects, the company’s shares are basically worthless because it’s losing money.

The markets in the US are closed on Friday to mark the crucifixion of Christ so we will have to wait until next week to see what happens with the price. Over the coming weeks and months, participants in the market will work to try and find a more fair value for the company.

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