At the time of writing, social media platform Reddit has recently released its initial public offering at the top of its targeted range of US$31 to US$34 a share on March 20, according to Reuters. Reddit along with existing shareholders sold 22 million shares for $34 apiece, giving Reddit a total valuation of US$6.4bn. It reserved 8% of all shares on offer for eligible users and moderators in Reddit, certain board members, friends and family members of its staff, to gain retail investors. Reddit was able to raise US$519.4m from its IPO. A report by Reuters the next day stated Reddit and its bankers were ‘guiding that they could price the IPO at the top of the indicated range or above’, which was a ‘vindication of Reddit’s decision to lower its valuation expectations’, after it was valued at US$10bn in a private fundraising round in 2021.
Reddit’s successful offerings could help bolster the lacking tech IPO market after two years of ‘largely subdued’ dealings, with the market launches of other big names earlier like KKR-supported BrightSpring and sportswear firm Amer Sports received ‘lukewarm reception[s]’ from investors.
However, despite significant user loyalty, Reddit has suffered losses every year since its launch in 2005, ‘lagging’ behind the success of Facebook and X. The focus of many Reddit users, or Redditors, on niche subjects and a rather loose approach to content moderation by Reddit have been ‘sticking points’ for advertisers, diminishing sources of revenue. Furthermore, its source of content moderation can certainly be volatile- it relies from volunteers on its user base to moderate content posted on its forums, who can ‘withdraw from their duty at any time’, prompting a mass quit in protest last year over Reddit’s decision to charge third-party app developers for access to its data. Based off of such decisions, it seems an investment in Reddit may be far from safe.
According to business analyst Daniel Pereira, Reddit has traditionally been reluctant to monetise its viewers, and its ads are less targeted than competitors such as Meta and X, so it must display more ads to gain the same revenue, Furthermore, its user base is more likely to use ad blockers than the other two, so the platform is overall seeing an uphill climb in competition.
Certainly, though, Reddit is highly influential in the investing world and should not be overlooked as a key catalyst in several significant recent events. For example, the ‘“meme-stock saga” of 2021’ was fuelled by Reddit’s online forum, or subreddit, r/wallstreetbets, where multiple retail investors collectively bought shares of highly shorted firms such as video game retailer GameStop.
Reddit itself is a powerful platform, raking in an average of 73.1 million ‘uniques’- users using the platform at least once a day between October 1- December 31, 2023, states a regulatory finding. It’s also making efforts to increase profitability- Pereira states Reddit is working on improving ad accuracy and exploring new ad formats. Reddit also has a huge wealth of user data, which could easily be monetised. Naturally, Reddit must be transparent over the data’s usage and ensure it is not used maliciously by buyers.
To conclude, what may be needed is patience and prudence. Once the IPO initial hype dies down, seeing stock prices open at $47 on the NYSE, surging 48% to breach $50 and stabilising slightly back down to opening prices, Reddit’s business model and overall growth strategy must be analysed if it releases any official reports. For now, due to Reddit’s heavy investment into new strategies, ventures and products, coupled with its reluctance to monetise its user base and lesser extent of targeted advertising, suggests it is most likely to continue making losses and not breaking even. Therefore, prudence is needed to look at Reddit’s long-term potential, and any investments made should be done so in moderation.
Certainly, with its efforts to increase profitability and become a more attractive investment, this stock is certainly not without potential.
Summary of Key Points:
-Reddit isn’t a guaranteed bet- it has been making losses since its inception, but due to it showing promise in terms of improving profitability, investors should be aware of the potential it could generate.
Author: Kendrick Low
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