Reddit Soars Ahead of S&P500 Inclusion

Investors are watching Reddit's stock performance for clues about the future of LLM development, SpaceX, and other AI-tied social media platforms like Meta.

Key Points In Focus

• Reddit's share price jumped 11% after an extraordinary announcement that it would join the S&P 500 index despite the share price underperforming.
• The company projects revenue to continue growing at an annual rate of over 60% through the rest of the year, with institutional investors generally bullish.
• Retail traders have pushed up the share price, which could lead to short-term underperformance, in line with other AI-adjacent social media firms.

Reddit Jumps: A Sign of the Tech Trend?

Shares in the social media and content aggregation platform Reddit jumped 11% on Friday after announcing it would be included in the S&P 500 index as part of an extraordinary rebalancing by S&P Dow Jones. Typically, the index is updated at the end of each quarter, but AvalonBay is being removed after Equity Residential acquired it, creating a vacancy. Analysts believe that the inclusion will mean that index funds would need to buy around 16.7 million shares after Tuesday, with a total value of just under $3 billion. That's almost three times the company's normal daily trading volume, at 6M per day.

The stock could get broader attention given its connection to broader tech trends, particularly AI companies. There was a lot of speculation last month as SpaceX was rapidly added to the Nasdaq, but it subsequently underperformed despite significant institutional investment and a swath of broker upgrades. Reddit has positioned itself as an AI-adjacent company, providing authentic human content and partnering with hyperscalers to train AI models. The company has signed a series of lucrative partnerships with LLMs, which has diversified its income sources. However, the company still gets over 90% of its revenue from ads and is firmly in the social media space. However, it's in a position similar to Meta's, which has underperformed as AI enthusiasm cools and traditional income sources (on-platform ads) struggle to keep up with the tech hype. Reddit could be entering a similar situation, as it has exhausted the LLM partnership landscape and its share price has declined 37% from its peak, even after Friday's 11% gain. 

Can The Stock Recover?

Historically, between the announcement of inclusion in an index and the index's addition, companies outperformed the index they were promoted into. But after inclusion, they have subsequently underperformed by about 2%. This is usually the result of retail traders pushing the price higher ahead of inclusion, followed by a drop-off in retail interest. Traders will be keen to see whether Reddit follows the same pattern, particularly since it hosts a major community of retail investors. Institutional investors remain bullish on the stock over the longer term, with brokers' median price forecast indicating a rise to $215.31, implying a potential 21% upside over the next year. However, this is relatively modest compared to the company's past performance, which has seen 60% revenue growth over the last eight quarters. Reddit expects the trend to slow modestly in the second half, but it touted a 70% increase in advertisers amid a market shift towards companies seeking to advertise to real humans. Like many AI-adjacent companies, Reddit's share price is driven more by high expectations than by its underlying financials.  

Reddit Contained Within VWAP Range

Despite rising to $185, Reddit stock remains below the regional peak at $208 and the upper VWAP line at $190. However, given the higher low at $135 and the rejection at the lower VWAP, a break above the descending trendline and the $200 resistance could pave the way to $265 in the longer term. On the flip side, a drop through the middle VWAP at $165 could push prices under the lower trendline, opening the door to $120. Such a scenario would render the entire structure off the latter low as corrective.

Source: SpreadEx | Reddit, Daily Chart