Reddit (RDDT 7.02%) stock had its initial public offering (IPO) on March 21, with an IPO price of $34 per share, and the social media company's share price has seen strong bullish momentum.
With the stock now sitting at roughly $65 per share, Reddit has roared 91% from its pre-trading IPO price. But one Wall Street firm is advising investors to take a more cautious approach to the otherwise red-hot stock.
New Street published a note initiating coverage on Reddit stock on March 26, assigning a neutral rating. The firm also assigned a one-year price target of $54 per share. That would suggest potential downside of roughly 17%.
Reddit stock could be volatile in the near term
New Street anticipates that Reddit will see volatile trading until the company releases its first earnings report. While the social media specialist laid out sales and earnings performance and other key metrics with the S-1 filing it submitted ahead of its IPO, there's a solid chance that investors won't have much other information before the business publishes its first earnings report.
While excitement for Reddit stock could continue to surge thanks to a data-licensing deal the company has signed with Alphabet to train large language models (LLMs), and OpenAI CEO Sam Altman's substantial ownership stake, New Street thinks these potential catalysts are already baked into the company's valuation. The firm's analysts also believe that momentum for user growth and advertising partners are already priced in.
While I think Reddit has aspects that make it intriguing as a long-term investment, I believe that New Street is likely right that the stock will see big swings in the near term on relatively little news. Investors may want to wait for some pullbacks from current levels and for more information from the company before making large investments in the company. On the other hand, dollar-cost-averaging could help reduce volatility risks for bullish investors who see the stock rocketing higher from current levels.
