Can Reddit potentially reignite the stalled IPO market after 30% pump?

$RDDT(RDDT) 30% Pump on March 25th!

Reddit, the popular online platform founded in 2005 by Steve Huffman and Alexis Ohanian. It was acquired by publication giant Conde Nast in 2006. The company is poised for a landmark stock market debut, marking the first major social media IPO since Pinterest in 2019.

Reddit's journey to its IPO has been a testament to the fluctuating nature of the market, beginning with its confidential filing in 2021—a year that saw US IPOs reach a record high of $339 billion. However, the landscape for IPOs drastically changed, with figures plummeting to just $26 billion last year.

Known for its vast array of over 100,000 niche discussion groups—ranging from the serious to the comical—Reddit has become a hub for tens of millions of users worldwide. Its forums, or subreddits, cater to a wide spectrum of interests, from the trivial to the existential. The platform notably played a central role in the 2021 meme-stock saga, where its wallstreetbets community famously drove up the stock prices of companies like GameStop. As Reddit approaches 827 days since submitting its paperwork to go public, the anticipation builds for this influential entity to make its mark on the financial market.

The IPO Details

Reddit Inc. is set to price its initial public offering (IPO) after the market close, with trading expected to commence tomorrow. The company has indicated a price range of $31 to $34 per share for the sale of 22 million shares, aiming to raise between $682 million to $748 million. This pricing strategy positions Reddit with a valuation of approximately $5.8 billion to $6.4 billion, a significant 36% decrease from its 2021 valuation. Despite this decline, the offering is reportedly four to five times oversubscribed, reflecting high demand and potentially enabling Reddit to achieve its targeted valuation of around $6.5 billion. Notably, this IPO marks a pivotal moment for Reddit, which was acquired by Condé Nast in 2006 and spun off as an independent entity in 2011, as it seeks to capitalize on its influential position within the social media landscape.

Leading the IPO are prominent financial institutions including Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co., and Bank of America Corp., underscoring the significance of Reddit's market debut. Scheduled to trade on the New York Stock Exchange under the ticker symbol RDDT, the offering reflects strategic pricing to enhance the likelihood of a positive market reception and mitigate potential dissatisfaction among Reddit's engaged user base. The company's approach to its valuation, intentionally set lower than the peak $10 billion figure from its last fundraising in August 2021, is a tactical move designed to attract investors wary of unprofitable ventures and to foster optimism for a successful first trading day, thereby nurturing confidence in Reddit's long-term market prospects.

Financials

Despite market challenges, Reddit has demonstrated growth in its user base, boasting an average of 73.1 million daily active unique visitors in the fourth quarter. The company reported a net loss of $91 million on revenue of $804 million in 2023, an improvement from the previous year's $159 million loss on $667 million in revenue. Reddit's reliance on advertising, which accounts for 98% of its revenue, has been a double-edged sword, contributing to its current unprofitable status, yet showing signs of improvement with a net income of approximately $18.5 million in the last quarter of 2023.

Reddit's financials reveal a company inching closer to profitability, with a reported 21% top-line growth and a net loss narrowing to $90.8 million in 2023 from $158.6 million the previous year. The platform is aiming for a significant increase in ad revenue, projecting a 20% rise to just over $800 million for the year, despite not meeting its ambitious $1 billion target due to a weakened ad market. This challenge is compounded by the company's historical inability to turn a profit since its inception in 2005, contrasting with the commercial successes of other social media giants like Facebook and Twitter. Nevertheless, Reddit's strategy to boost ad revenue and marketer spending by 20% in 2024 reflects its determination to overcome profitability hurdles and capitalize on its devoted user base's loyalty. Reddits Top 10 customers account for 25% of revenues.

The concentration of Reddit users on specialized topics, combined with the platform's relatively relaxed content moderation policy, has raised concerns among some advertisers. Reddit depends on volunteer moderators from its user community to oversee the content shared across its forums. Moderators have the freedom to step down from their roles whenever they choose, which was notably demonstrated in 2023 when numerous moderators resigned in protest of Reddit's move to levy fees on third-party app developers for data access.

FTC Inquiry

The Federal Trade Commission (FTC) has initiated a non-public inquiry into Reddit's practices surrounding the sale, licensing, and sharing of user-generated content with third parties for the purpose of training artificial intelligence (AI) models. On March 14, 2024, Reddit received a letter from the FTC indicating that the agency's staff is conducting an investigation into how the social media platform handles user-generated content, especially in relation to AI development, as revealed in a SEC filing.

In the midst of this scrutiny, Reddit has entered into a significant partnership with Google, aiming to leverage its vast reservoir of user-generated content to train Google's AI models. This deal, reported to be valued at approximately $60 million annually, marks a strategic move by Reddit to tap into new revenue streams as it gears up for a highly anticipated stock market debut. Facing intense competition for ad revenues from platforms like TikTok and Meta's Facebook, Reddit announced last year its plans to monetize access to its application programming interface (API). The contract with Google, owned by Alphabet, is Reddit's inaugural agreement with a major AI entity and comes at a time when AI developers are increasingly seeking to secure deals with content creators to enhance their training datasets while navigating the complex landscape of copyright and content usage rights.

A Unique Approach

Reddit is taking a unique approach to its initial public offering (IPO) by allocating about 8% of the shares to a diverse group that includes its users and moderators who joined before January 1, board members, and the friends and family of employees and directors. These shares will be immediately tradable, without the customary lockup period, allowing holders the option to sell on the first day of trading. This decision is part of Reddit's strategy to engage its community and reward the platform's most loyal participants, differentiating its IPO from more traditional offerings which typically favor large institutional investors.

In addition to this inclusive approach, Reddit is extending the opportunity for individual investors and dedicated users to purchase shares at the IPO stage, diverging from the norm of prioritizing sales to big institutional entities. This series of decisions reflects Reddit's commitment to involving its community and employees in the IPO process, making it one of the most anticipated and closely watched market debuts of the year.

However, it does raise red flags as the customary lock-up period tends to protect investors against immediate selling by shareholders. This could point to a volatile start to RDDTs trading history.

The principal shareholder of Reddit is Advance Magazine Publishers Inc., a component of the Newhouse family's publishing conglomerate that includes Conde Nast. Conde Nast acquired Reddit in 2006 and later spun it off in 2011. Sam Altman is recognized as the third-largest shareholder of Reddit.

Conclusion

As Reddit prepares for its highly anticipated initial public offering (IPO), it marks a significant milestone in the platform's history since its inception in 2005 by Steve Huffman and Alexis Ohanian, and its acquisition by Conde Nast in 2006. This event is set to be the first major social media IPO since Pinterest in 2019, amid a changing market landscape that saw a dramatic drop in IPO figures from $339 billion in 2021 to just $26 billion last year. Despite these market fluctuations, Reddit has maintained its appeal with over 100,000 niche discussion groups and a robust user base of 73.1 million daily active visitors, showcasing significant growth and an active community engaged in everything from meme-stock movements to everyday discussions. The platform's IPO strategy is unique, with Reddit offering about 8% of its shares to its community of users, moderators, board members, and associates, allowing for immediate trading without the usual lock-up period, signaling a new approach to engaging and rewarding its community.

Financially, Reddit has shown signs of nearing profitability, with a 21% top-line growth and a reduced net loss in 2023, despite relying heavily on advertising revenue, which presents its own set of challenges and opportunities. The Federal Trade Commission's inquiry into Reddit's content sharing practices for AI model training, particularly with the significant Google partnership, highlights the evolving landscape of content usage rights and monetization strategies. This partnership, alongside Reddit's approach to its IPO and community engagement, underscores the platform's efforts to navigate competitive ad markets and potential revenue streams. As Reddit moves forward with its IPO, led by financial giants like Morgan Stanley and Goldman Sachs, and shares set to trade under the ticker RDDT, the platform's innovative strategies, including its community-first approach to share allocation and the strategic partnership with Google, position it as a noteworthy entity in both the tech and financial markets, even as it navigates the challenges of profitability and regulatory scrutiny.