Reddit users have taken the investing world by storm and emerged as a surprising new power base this year, helping to power huge gains for companies including AMC Entertainment Holdings and GameStop and highlighting the influence of retail investors. While some Reddit stocks have a reputation for being short-term plays, other stocks favored by investors on the platform have promising long-term performance outlooks.
With that in mind, we put together a panel of Motley Fool contributors and asked them to identify popular Reddit stocks that could go the distance. Read on to see why they think these three companies have what it takes to score big wins.
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ContextLogic
Keith Noonan: ContextLogic's (WISH -1.18%) stock recently surged after emerging as a new favorite on Reddit's WallStreetBets discussion board, and it could still be a worthwhile buy for risk-tolerant investors. The company operates Wish -- a bargain-focused e-commerce platform that specializes in low-cost, off-brand goods, and the business could significantly outperform expectations if it continues to make inroads with merchants and budget-conscious shoppers.
ContextLogic went public last December and has seen volatile trading since its market debut. The stock climbed to roughly $33 per share following its IPO listing price of $24 per share, but the company's valuation collapsed as the market moved out of tech stocks in favor of value-oriented reopening plays and a larger-than-anticipated first-quarter loss spooked investors.
The stock is up roughly 36% from the lifetime low it hit earlier this month thanks (at least in part) to the Reddit bump, but it still trades down roughly 69% from the lifetime high it hit earlier this year. With that kind of volatility, it might not come as a surprise that the stock has gained favor with investors on WallStreetBets.
Is ContextLogic the best company in the e-commerce space? No, it would be hard to make that case. However, the Wish mobile app has a sizable active user base, and favorable growth trends for the broader e-commerce market could help boost performance.
ContextLogic is valued at just 1.9 times this year's expected sales, but it remains a somewhat risky investment. The low price-to-sales multiple reflects concerns that the business is still operating at a loss and growing at a slower clip compared to leading e-commerce players, but the company's valuation still leaves room for big upside, and patient investors could see strong returns from the stock.
Opendoor Technologies
Jamal Carnette: Opendoor Technologies (OPEN -1.63%) lacks the chatroom traffic popular meme stocks like GameStop and AMC Entertainment generate, but it is backed by venture capitalist Chamath Palihapitiya. Palihapitiya became an honorary "ape" in chatrooms worldwide for railing against pandemic bailouts and taking Virgin Galactic Holdings and Clover Health, two meme stocks, public via SPAC reverse mergers.
The housing market is red hot. Home prices posted a 13.2% yearly increase in the latest Case-Shiller National Home Price Index reading, the highest annual growth in 15 years. You have to compete not only with buyers rife with pandemic savings, but also with institutional money as pension funds and investment managers like BlackRock are snapping up entire subdivisions.
Yet the homebuying process remains a relic of the 20th century with many processes designed to enrich middlemen at the expense of retail consumers. Reinventing the homebuying process and lowering transaction costs has the potential to expand homeownership much like low-cost trading has done for stock ownership.
That's Opendoor's opportunity. The company primarily operates under the iBuying model, where the company will buy and sell homes directly to customers instead of performing the traditional role of agent, which only matches buyers and sellers. iBuying eliminates many of the headaches associated with traditional home sales including working with real estate agents, performing repair work, and holding open houses.
Of course, there are risks. Most notably Opendoor assumes inventory risk and faces potential "underwater sales" in down markets that could impact profitability. However, that hasn't been a risk in today's red-hot housing market.
In the first quarter, the company reported a 7% gross profit increase from the year-ago period despite revenue declining by 40%. The difference? Opendoor sold fewer homes but grew per-unit profitability due to home price appreciation. Investors need not worry about the revenue decline: The company guided for a 41% increase over the prior year next quarter.
Like most meme stocks, Opendoor isn't for the faint of heart, but for investors with a high-risk tolerance and a long holding period this could be the company that disrupts the trillion-dollar housing industry.
Rocket Companies
Joe Tenebruso: Not all meme stocks are trading at astronomical valuations. In fact, one stock that's seen its mentions ramp up on Reddit in recent days is currently trading at one of the lowest price-to-earnings (P/E) ratios of all the stocks I follow: Rocket Companies (RKT -4.66%).
As the country's largest mortgage originator, Rocket Companies has profited handsomely from historically low interest rates. The parent company of Quicken Loans and Rocket Mortgage saw its revenue more than triple in 2020 to $15.7 billion, fueled by a 121% surge in closed loan origination volume, to $320.2 billion. Its net income, in turn, soared more than tenfold, to $9.4 billion.
Rocket Companies was so profitable that it paid a $1.11-per-share special dividend to its shareholders. Its strong cash flow generation also allowed it to ramp up its growth investments, which helped to drive strong increases in its automotive, home buying, title insurance, property valuation, and settlement services.
Despite this impressive performance, Rocket Companies' stock trades for less than 10 times analysts' earnings estimates for 2021. That's largely because the mortgage refinancing market is expected to cool this year, and investors are concerned that an eventual rise in interest rates could lead to further declines.
However, rather than rising, the yield on the 10-year Treasury note has actually fallen back below 1.5% in recent days, and it's possible that rates could remain low for quite some time. Low interest rates would bode well for Rocket Companies -- and for investors who buy the mortgage titan's shares today.
