Reddit's Sliding Stock: Advance's Borrowing Plan and Its Implications

Reddit's stock took a tumble on Friday as investors reacted to a report that Advance Magazine Publishers is planning to borrow against its large stake in the social media platform. The stock slid over 7% in afternoon trading, despite a strong recent run that saw shares surge 16% on Thursday and gain nearly 18% for the week. But what does this borrowing plan mean for Reddit's capital structure and future growth?

Advance is reportedly seeking to raise as much as $1.2 billion in a sale of 7.8 million shares, priced between $145.38 and $148.54 each. This would represent a discount of as much as 8% to Reddit's closing price on Thursday of $158.02. The sale is part of a plan to establish a credit facility, with Advance also buying derivatives on the shares to maintain its ownership stake.

The borrowing plan could have significant implications for Reddit's capital structure and potential future financing costs. By selling $1.2 billion worth of shares and buying derivatives, Advance maintains its ownership stake, potentially reducing Reddit's equity float. This could increase the shares' scarcity and drive up the stock price, which in turn may raise future financing costs for Reddit. However, it's crucial to note that the details of Advance's plan are not yet finalized and could change.

Separately, Chinese tech giant Tencent Holdings disclosed late Thursday that it sold roughly $400 million in Reddit stock this month, reducing its stake by about 28% to around 7.75 million shares. The sales cut Tencent's stake in Reddit by about 28% to around 7.75 million shares, according to Dow Jones Newswires. Tencent led a $300 million venture funding round for Reddit in 2019 that valued the company at $3 billion.

Reddit stock has soared more than 191% since its initial public offering in March, with shares turning red-hot after the company posted a surprise profit with its third-quarter results in late October. Reddit stock is up 25% in November and gained 81% in October.

Advance, through Conde Nast, acquired Reddit in 2006 for $10 million before spinning the startup back out five years later. It remains one of the company's largest shareholders. Bloomberg's report added that the details of Advance's plan have not yet been finalized and could change.

In conclusion, while the planned borrowing by Advance and the recent stock sales by Tencent have raised concerns, Reddit's strong financial performance and robust business model suggest that the company can weather this storm. Reddit's enduring business model and management team make it an attractive long-term investment, even if short-term share price volatility occurs. As investors, it's essential to stay informed about these developments while maintaining a balanced perspective on the company's fundamentals and growth prospects.