Let’s be honest… There’s no point in going public these days if you can’t say you’re an AI company.

Last month, Reddit filed with the U.S. Securities and Exchange Commission for an initial public offering (“IPO”). It plans to trade under the symbol RDDT on the New York Stock Exchange.

The social media website was founded in 2005. Today, it consists of more than 100,000 active message board-like communities called “subreddits,” with 267.5 million weekly active users.

But that isn’t enough for Reddit…

In its IPO filing, Reddit mentions “artificial intelligence,” “AI,” “large language models,” and “LLM” a total of 83 times.

Reddit mainly sells advertising. But it’s now experimenting with new ways to monetize the data it gathers from its users. Most recently, that means allowing Google to train AI models with the content from its forums… thanks to a $60 million deal with the tech giant.

Reddit is using the AI-fueled rally to enter the market with a bang. Its IPO might seem like perfect timing.

But investors, beware. We’ve seen this kind of mania before… And as I’ll explain today, this hot new stock isn’t all that it seems.

The entire “meme stock” phenomenon of 2021 started – and caught fire – on a subreddit called WallStreetBets.

That’s where financial analyst and investor Keith Gill first began touting shares of video-game retailer GameStop (GME). He argued that because they were heavily shorted, a wave of buying could send the stock skyrocketing in a massive short squeeze.

The WallStreetBets community loved the idea of so many “David” investors sticking it to big-money “Goliaths.” Gill had inadvertently stoked a rebellion in the stock market… And it worked.

“Redditors” poured money into the stock, squeezing out the shorts. The flurry of Reddit-fueled trading pushed GameStop from a low of 70 cents per share in 2020 to a high of $86.88 on January 27, 2021 – a rapid 124-fold rise.

Goliath lost big… Hedge fund Melvin Capital’s GameStop short cost it nearly $7 billion in January 2021. The fund was forced to liquidate in May 2022. Hedge fund Citron Research didn’t disclose dollar losses but said it took a 100% loss on its GameStop short.

It looked good for the little guys… at first. Gill reportedly invested $53,000 that turned into nearly $50 million as of late January 2021. (We haven’t heard whether he cashed in any of those gains before shares crashed again.)

Of course, the triumph was short-lived. Most Redditors and other know-nothings lost money on GameStop.

The stock now trades more than 80% below its all-time meme-stock-era high. It was always a lousy, dying business loaded with debt… which is why it was so heavily shorted in the first place.

GameStop’s fellow meme stock, cinema chain AMC Entertainment (AMC), followed a similar trajectory. It soared from a little more than $12 on January 6, 2021 to a high of more than $386 – a 31-fold increase – on June 2 that year.

AMC’s new shareholders admitted they knew nothing about the business and called themselves “apes.” They swarmed social media sites to declare they were “not leaving,” meaning they’d never sell the stock.

They bought one of the biggest pieces of garbage ever to trade publicly… and held onto it like it was Berkshire Hathaway.

AMC took the apes for all they were worth. It created and sold billions of dollars of worthless shares at exorbitant prices. The company had fewer than 6 million shares outstanding in the third quarter of 2020… 51 million in the second quarter of 2021… and more than 263 million today (all pre-August 2023 numbers have been split-adjusted).

AMC currently trades about 99% below its meme-stock high.

Becoming a meme stock is a great way to fleece shareholders. But if you can’t make that happen, an IPO on a major stock exchange in the middle of a huge, AI-fueled tech rally is not a bad Plan B…

That’s what Reddit is effectively about to do. And just like AMC, it will do it by selling its users mountains of shares.

In a highly unusual move, the company has decided that it’ll give 75,000 of its most active users a chance to buy a total of 1.3 million shares at the IPO price – a privilege usually reserved only for institutional investors.

The timing is no coincidence. Reddit first filed confidentially for an IPO in December 2021 – about a month after the Nasdaq peaked. Back then, the market kept falling and took the company’s debut with it.

Now that the AI craze has pushed the market back into mega-bubble territory, Reddit is planning to strike while the iron is hot.

We’ll see about that. Reddit has never turned an annual profit in its 18-year history. It lost $90.8 million in 2023 on $804 million in revenues.

Reddit is yet another money-losing business. Letting Google mine its content won’t change that. Once again, investors will buy on buzzwords alone… and they’ll ride the hype all the way to the bottom.

The company that helped give birth to the most insane speculative financial-market episode since Holland’s “tulipomania” in 1637 is going public. And it’s planning to offer its users a chance to gamble on its fortunes.

What happens next is bound to surprise a lot of folks – even though we’ve seen it all before.

Good investing,

Dan Ferris

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth