Is Investing In Reddit's (RDDT) IPO A Smart Stock Move?

Reddit is finally going punlic.

Reddit is set to IPO under stock ticker RDDT. While a popular website, will it also be a stock everyone flocks to?

The quirky and occasionally controversial website Reddit will soon be a public company. Early signs show ample investor interest in the new stock, but should you get on board? Read below to decide.

What Is Reddit's IPO

Reddit is a social engagement platform consisting of 100,000-plus themed communities visited by roughly 73 million people daily. The company generates revenue through advertising and data licensing. Going forward, Reddit also plans to monetize gaming and commerce on its platform.

Below are the key milestones in Reddit's history.

2005: Reddit is founded by Steve Huffman and Alex Ohanian.
2006: Conde Nast buys Reddit.
2009: Huffman and Ohanian step down when their contracts expire.
2014: OpenAI CEO Sam Altman raises $50 million in Series B funding for Reddit and joins the company's board.
2015: Huffman returns to Reddit as CEO.
2020: Reddit changes stance on passive moderation and selectively bans hate-based communities.
2021: Subreddit Wallstreetbets sparks a short squeeze on GameStop GME stock. In the same year, Reddit is valued at $10 billion in a private fundraising round.
2023: Reddit communities shut down briefly as Redditors protest the company's decision to charge for access to its API.
2024: Reddit becomes one of the most anticipated of 2024 IPOs by registering to begin trading publicly on March 21, 2024.

The Reddit IPO will sell 22 million shares of Class A stock under the NYSE ticker RDDT. Roughly 6.7 million of the available shares are coming from selling stockholders, including CEO Steve Huffman and other Reddit employees.

Reddit has also reserved 1.76 million Class A shares for a Directed Share Program. The DSP allows eligible Redditors, board members and friends and family of Reddit employees to buy RDDT stock at the opening price. Highly engaged Redditors were personally invited to participate. Those who didn't receive an invitation had to pre-register for the IPO by March 5.

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Limited Voting Rights

If you're considering taking stock in Reddit, know that you won't have much say in how the company is run—no matter how many shares you buy. The IPO is offering Class A shares only, which come with one vote per share. Class B shares, however, get 10 votes per share.

After the IPO, Reddit officers and directors will own nearly 35% of the Class B stock. Other Class B shareholders include:

Media company Advance Magazine Publishers
Institutional investor FMR
OpenAI CEO Sam Altman
Chinese tech company Tencent
VC firm Vy Capital

Reddit Key IPO Metrics

Ticker: RDDT
Exchange: NYSE
Targeted, fully diluted valuation: $6.4 billion
IPO date: March 21, 2024
Expected stock price: $31 to $34
Expected market cap: $4.9 billion to $5.4 billion

Post-IPO, there should be 158 million to 162 million Reddit shares across all classes of its stock. The range accounts for the underwriters' option to sell additional shares. With 158 million shares and an expected per-share price of $31 to $34, Reddit's market cap will be $4.9 billion to $5.4 billion.

According to recent reports from Reuters, the Reddit IPO is four to five times oversubscribed. Unnamed, inside sources also say the pricing will be at the top or above the estimated $31 to $34 range. Every dollar added to the share price above $34 increases the company's market cap by $158 to $162 million, depending on the final share count.

Is Buying Reddit's IPO A Smart Move?

Buying into the Reddit IPO is risky. For most investors, I think it's too risky to bother.

Reddit is a 20-year-old company with an unproven business model, a history of controversy and no track record operating under public scrutiny.

According to a Bloomberg report, Reddit was profitable in the fourth quarter of 2023. That, however, may be the extent of the company's profitability. Financial statements included in Reddit's registration filing show a $90 million loss in 2023 and a $158 million loss in 2022.

The good news is that revenue grew 20% to $800 million last year. That shows momentum. Whether the momentum continues or flames out remains to be seen.

The company does expect to build a revenue stream from data licensing to AI projects. The test case is the $60 million deal struck with Google GOOG to use Reddit conversations for training AI models.

Reddit's legacy revenue source, advertising, may be tough to scale. The proliferation of hate speech on the platform plus Reddit's lax approach to moderation may be off-putting to advertisers. Any new controversy associated with Reddit communities could scare big-budget advertisers away.

On the other hand, a more aggressive stance on moderation could also send Redditors packing. Worse, it could motivate Redditors to attempt an attack on RDDT's stock price.

Reddit has tried to win Redditors over with IPO access through its DSP. Unfortunately, they're not all on board. Concerns have surfaced about steps Reddit will take to realize profitability. One user called the DSP a scam.

Managing the needs of both advertisers and Redditors isn't new for Reddit. But the balancing act becomes far more delicate when shareholder demands come into play. It's too early to know if Reddit's leaders are up to the task.

Bottom Line

Most investors should steer clear of Reddit for now. Let the company get through a few earnings cycles first. Then assess Reddit's profit potential and Huffman's ability to lead the company through the inevitable controversies it will face.

Frequently Asked Questions (FAQs)

What Is Reddit?

Reddit is a social engagement platform consisting of more than 100,000 themed communities visited by roughly 73 million people daily. The company generates revenue through advertising and data licensing. Reddit also plans to monetize gaming and commerce on its platform.

When Is Reddit's IPO Date?

Reddit is pricing its IPO on March 20 and begins trading as a public company on Thursday, March 21, 2024.

What Is Reddit's IPO Valuation?

Reddit is targeting a fully diluted valuation of $6.4 billion. Early reports that the IPO is over-subscribed indicate that the company could realize that target.

Is Investing In IPOs Risky?

IPO investing is risky due to limited information. There is no analyst coverage, no track record as a public company and minimal financial data to review. According to University of Florida researcher Jay Ritter, new stock issues underperform the broader market in their first three years by more than 18%.

Is Investing In Reddit's IPO A Smart Stock Move?

What Is Reddit's IPO

Limited Voting Rights

Reddit Key IPO Metrics

Is Buying Reddit's IPO A Smart Move?

Bottom Line

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