Stocks to sell

Meme Stock Massacre: 3 Reddit Darlings on the Brink of Collapse 

As of this writing, Reddit (NYSE:RDDT) stock has been publicly trading for about a month. For a variety of reasons, the stock is down about 20%. But what may be most concerning is that volume is down sharply. It’s too early to draw firm conclusions. However, the stock does not appear to have the committed following of some Reddit stocks that were a core argument for the company’s initial public offering (IPO).

The popularity of these “meme stocks,” on subreddits such as WallStreetBets made the social media site a household name among investors. Documentaries have been made to describe the phenomenon and perhaps serve as a cautionary tale.

In fairness, meme stocks get a bad rap. There are many popular Reddit stocks that most investors would be happy to own. But this is a site for speculators, many of whom have a “go big or go home” mindset that encourages risk-taking.

The Reddit community is great for providing investors with support and knowledge they may not otherwise get. But the herd mentality is real. And it can blind you to some risks that are simply not worth taking. Here are three Reddit stocks that present risks that don’t appear to be worth taking anymore.

GameStop (GME)

Source: shutterstock.com/EchoVisuals

GameStop (NYSE:GME) is one of the original Reddit stocks to gain prominence. Investors remember it for its meteoric rise caused by an epic short squeeze in 2021. The issue for investors then, as now, is the desire to confuse an inexpensive stock with a stock having hidden value. GME stock is cheap, but does it still have value?

GameStop’s core business is to the gaming industry what Blockbuster video is to Netflix (NASDAQ:NFLX). It’s simply been bypassed by the proverbial better mousetrap. And the company’s pivot into collectibles, while interesting, won’t be a significant driver of revenue. 

That leaves the company’s chairman, Ryan Cohen, who has the opportunity to buy securities of other companies. That makes GameStop a hedge fund by another name. Could it work? In theory, it could. But as my InvestorPlace colleague Rich Duprey summarized recently, “…Profits Mean Nothing When Your Business Is Dying.” Another short squeeze is improbable. The game appears to be over.

Nio (NIO)

Source: Freer / Shutterstock.com

For a time, Nio (NYSE:NIO) looked like it would be a rags-to-riches story. As the electric vehicle (EV) market revved up, Nio appeared to be a clear winner. But with the stock down 60% in the last 12 months, Nio faces some difficult challenges as the stock sinks back into penny stock territory. 

The company managed to increase deliveries in its most recent quarter. But that doesn’t change the reality that the company is losing market share in its home country, China. And it was losing market share when the Chinese market was red hot. That market is cooling, and so is the company’s gross margins. The general cooling in the EV market is also affecting the company’s deliveries in Europe. 

Also, a core piece of Nio’s business model is its battery swap program. The company is committed to building 1,000 more swapping stations in 2024. That will also come at the expense of profitability.

And if you need another reason to stay away from NIO stock, it’s essential to note that short interest is up 16.5% in the last month. In a competitive market, Nio appears to be running out of juice.

Lyft (LYFT) 

Source: OpturaDesign / Shutterstock.com

Lyft (NASDAQ:LYFT) is part of a duopoly, such as it is, with Uber Technologies (NYSE:UBER). The company has been increasing its revenue steadily. It’s also getting closer to profitability. But being close is not the same as being profitable. And higher interest rates will hurt unprofitable companies harder. 

However, the bigger issue for Lyft, and the ride-hailing model in general, is coming from Minneapolis, Minnesota. On August 17, the city council passed an ordinance that, if passed into law, would guarantee the city’s $15 minimum wage for any driver with rides originating in Minneapolis. 

Both Lyft and Uber are threatening to pull out of the city if the law is passed. It’s not hard to see why. The driver/gig worker remaining as an independent contractor is essential to Lyft’s ability to manage its costs, particularly as it prioritizes profitability.

At this time, it’s unclear if the law will pass. But it seems likely that Minneapolis won’t be the only city trying to pass such laws. Investors hate uncertainty with the bluest of blue-chip companies and like it even less with an unprofitable mid-cap stock with an entrenched and profitable competitor in the sector.

On the date of publication, Chris Markoch did not hold (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. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

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