The much-anticipated Reddit stock (NYSE:RDDT) IPO is now old news, with RDDT officially trading on the New York Stock Exchange on March 21, more than a decade after many of its counterparts. Under the ticker “RDDT,” shares debuted at $47, soaring to nearly $75 at their peak, marking a 120% increase from its initial $34 offering. At its zenith, Reddit’s market cap reached approximately $12.2 billion.

Reddit’s recent IPO, followed years of preparation, with the company hiring its first CFO in 2021. This offering also marks a significant milestone for the platform. As the first social media company to go public in years, its performance may influence other competitors considering IPOs. The funds raised could support growth initiatives, including diversifying revenue streams and establishing a stable ownership structure amidst past leadership controversies.

The social media platform’s path to success remains uncertain. Despite its popularity, the company has yet to achieve profitability, acknowledging future challenges in this regard. And as part and parcel of offering loyal users a piece of the IPO, potential downside from continued near-term selling pressure could hamper this stock, at least for now.

So, with that said, let’s dive into whether Reddit stock is a buy, sell or hold following its IPO.

Why Buy?

Reddit exhibits overlooked AI potential in its vast repository of user-generated content. Serving as a rich source of authentic, long-form discussions, it offers third-party AI companies ample training data. This positions Reddit as a supplier in the AI ecosystem, unaffected by individual AI stock performance. 

Historical examples show early interactions between Reddit and AI, indicating its value as a training ground for evolving models. As AI’s importance grows, platforms like Reddit stand poised to benefit from the demand for quality training data.

Reddit’s stock surged above the 9 and 20 Simple Moving Averages (SMA) on the 4-hour chart last Friday, suggesting potential for further gains. Traders are eyeing the $51 price level, which has held as resistance multiple times in recent weeks. 

Why Sell?

Reddit tracks growth through user engagement metrics like Weekly Active Unique (WAUq) and Daily Active Unique (DAUq) users. In Q4 2023, global DAUq surged by 27% year-over-year, with the U.S. segment growing by 34% and international by 21%. Sequentially, the U.S. saw a 14% rise, while the global figure increased by 8%. 

However, Reddit’s growth is susceptible to external factors like global events and algorithm changes, leading to fluctuating user engagement. Notably, a significant portion of new users are logged out, posing challenges for revenue generation and monetization efforts.

A breakthrough above $51 per would signal positive momentum and likely attract more buyers, although reaching the previous all-time high of $74.80 from March 26 may take some time. That said, a continued deterioration below $40 per share could be very bearish for the stock, and that’s a key level investors are watching closely.

Mixed Expectations

David Trainer, CEO of New Constructs, recently criticized Reddit’s IPO, suggesting that the company might struggle to monetize its user-generated content without upsetting its user base. However, with the potential for upheaval in the social media industry due to pending legislation and Reddit’s significant user base growth, the company’s timing of its IPO could be advantageous to shareholders. 

Wall Street analysts see further growth potential for Reddit, having expanded its user base by approximately 40% between 2021 and 2023. Some analysts have pointed out significant growth opportunities for Reddit outside the U.S,. particularly in English-speaking countries like India. With Reddit available in fewer than 10 languages, expanding its accessibility globally could drive further growth. 

However, monetization remains a challenge, despite plans to license user data for AI training, exemplified by a recent $60 million deal with Google. Yet, some users express concerns about their content being used for AI, prompting regulatory scrutiny.

Be Cautious

Baird issued a Neutral rating for Reddit stock on Thursday, highlighting the platform’s distinctive social network but setting a modest $50 price target due to its perceived high valuation post-IPO. Analyst Colin Sebastian praised Reddit’s unique online platform, citing its expanding user base, extensive user-generated content, and generally safe environment for advertisers.

With approximately 267 million unique weekly users, Reddit stock experienced a 27% annual growth rate in Q4. Sebastian anticipated a robust 16% growth rate for 2024. Additionally, he highlighted the potential for Reddit’s platform to be licensed for training AI models, suggesting it could offer new revenue streams.

I think Reddit’s upside potential is unique, and this stock is fairly valued relative to a number of its peers. That said, I think waiting for the dust to settle before building a position makes sense. Right now, this stock is a hold for me, though I’d consider it a buy below $40 per share for sure.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.