Reddit Goes Public: Should You Invest or Hold Off?
Reddit is set to list a portion of its capital on the NYSE. Is this a prime buying opportunity or should investors consider a wait-and-see approach?
Key Takeaways
- Reddit is going to list part of its capital on the New York Stock Exchange.
- It has yet to record a profit but its turnover is growing year after year.
- Is it a buy chance or should investors wait and see?
Reddit is poised to debut on the New York Stock Exchange with the ticker symbol RDDT , potentially commencing trading in mere weeks. This marks the first social media IPO since Snap’s one in 2017.
However, before leaping onto this bandwagon, let’s ask ourselves: what’s the platform’s monetization strategy? Should we buy soon or adopt a wait-and-see approach?
Reddit To List In New York
Reddit is a social media that prioritizes vibes over viral fame. It’s a platform where individual passions take precedence over friend connections. With a unique give-and-take dynamic, Reddit engages users as viewers, creators, and unpaid moderators simultaneously. This fosters tight-knit, largely anonymous communities that evolve into diverse, highly engaged, and occasionally influential entities in their own right.
Take, for instance, the r/wallstreetbets frenzy, where a subreddit group shook the market and propelled certain stocks (almost) to the moon.
Despite boasting a devoted following of 73.1 million daily Redditors across its 100,000 forums, Reddit has yet to turn a profit. However, its losses are narrowing and its revenue streams are expanding. The company generates revenue primarily through offering a premium, ad-free experience and recently ventured into artificial intelligence (AI) data provision, striking a $60 million deal with Google this year alone.
Diversifying revenue streams is crucial as Reddit currently relies heavily on advertising, with just a few major clients contributing about 98% of its revenue. Moreover, the platform’s revenue is heavily skewed towards the US, accounting for approximately 81%.
Latest Results Are Not So Bad
In 2023, Reddit saw a revenue increase of 21% from the previous year, reaching $804 million. Notably, it also raised its average monthly earnings per user to $3.10, up from $2.90 in 2022. Despite these positive trends, the company still reported a $91 million loss in 2023, an improvement from its $159 million loss in 2022, but a reminder of ongoing challenges. Furthermore, its negative free cash flow of $22 million indicates substantial ongoing expenditures.
Reddit previously pursued an IPO in December 2021, aiming for a valuation of up to $15 billion before shelving plans due to market conditions. This time, the company is reportedly targeting a more modest $5 billion valuation. Additionally, Reddit is offering shares to 75,000 core users at the IPO price before public trading, a move typically reserved for institutional investors.
Why To Buy?
As it goes public, traders are now wondering whether Reddit is a good buy opportunity or if they should before see what the market does after the debut in New York and then, eventually, join the race.
Reddit holds a modest share in the vast and expanding digital advertising landscape, aiming to secure its portion of the lucrative $1 trillion pie. Currently capturing less than 0.001% of this market, its long-term strategy aligns with the industry’s growth trajectory. The global social media market, expected to surge by 13% annually to $413.2 billion over the next five years, presents ample opportunities for Reddit’s expansion.
With 41% of its US users aged 18 to 34 and 64% earning over $75,000 annually, Reddit attracts advertisers looking for affluent, younger demographics. Utilizing AI-driven ad targeting based on context and user interests, Reddit provides a unique and effective platform for advertisers to engage their target audience.
Beyond its role as a meme and AMA hub, Reddit serves as a valuable data platform and search engine, evidenced by its partnership with Google. This partnership underscores Reddit’s potential to provide valuable data for sentiment analysis, trend identification, and language model training.
Moreover, Reddit plans to monetize its user economy by enhancing tools and incentives for creators. It also wants to introduce a developer platform for community innovation, a contributor program for content creators, and a community marketplace for goods exchange.
With a proposed valuation of $5 billion, Reddit would be valued at just over six times the estimated trailing sales. This would position it favorably compared to industry peers like Meta and Pinterest. Despite its growth potential, Reddit’s valuation appears grounded, avoiding the speculative fervor seen in Snap’s debut, which traded at 60 times trailing sales.
Why Not?
Is that all? No, there’s also the other side to the coin. Reddit faces the common challenges shared by social media platforms. These include the volatility of Google’s algorithms impacting traffic and the vulnerability of the online advertising ecosystem to economic downturns.
The platform’s reliance on its user base, while its core strength, also poses a significant risk. Ensuring user satisfaction is crucial. Any dissatisfaction with changes in ad formats or content could lead to a mass exodus to alternative platforms. Additionally, balancing the interests of the community with profit goals presents a delicate challenge. This is particularly true considering the rebellious nature of Reddit’s users. And they have already demonstrated their ability to mobilize in protest.
Despite its longstanding presence in the industry, Reddit has yet to turn a profit. This raises questions about its ability to monetize its extensive user base effectively.
Furthermore, Reddit faces increasing competition from startups like Quora, 9gag, SmartNews, and Knotch, intensifying rivalry in the community-focused niche.
While offering IPO shares to dedicated Redditors is a novel approach, it also carries risks. If the stock underperforms, enthusiastic users could quickly sell their shares. This may potentially lead to volatile market dynamics reminiscent of past meme stock crazes.
Although Reddit currently benefits from AI-driven revenue streams, there’s a concern that as AI technology advances, the platform may become commoditized. This may reduce its value proposition for advertisers and diminish direct site visits or ad views.
Disclaimer
Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.
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