Reddit — the money-losing social media platform — is going public March 20 and the shares could rise sharply on the first day of trading. The reason? The company’s initial public offering is “currently between four and five times oversubscribed,” reported Reuters.
If you watch that first-day price pop and fear you are missing out, do not let FOMO make you buy shares on Wednesday. If you feel compelled to buy the stock, wait until it becomes clearer whether Reddit can deliver what Wall Street expects.
Despite the first day pop, Reddit investors who bought into the company in 2021 will take a haircut at the IPO. With a private valuation of $10 billion when the social network last raised money in 2021, the company shares are now more likely to be valued at $6.5 billion at the IPO.
That $3.5 billion haircut will at least enable Reddit to “reach its targeted price range of $31 to $34 per share when it prices the IPO in New York on Wednesday,” Reuters reported.
As I wrote last month, there are plenty of reasons to stay away from Reddit’s IPO. Here are three:
Redditors May Bolt Post-IPO. The key to Reddit’s success is the unpaid labor of the social network’s mostly anonymous communities. Volunteers moderate the topic-specific forums — called “subreddits,” which are based on their own rules. One such subreddit — WallStreetBets — is not thrilled about Reddit’s forthcoming IPO. Here is a comment from last month: “This s$@# is going to absolutely plummet and I can’t wait to see it,” wrote SnooDingos3776. Reddit warned future revolts or departures of these communities could harm the site. To prevent that exodus, Reddit is reserving shares for 75,000 of the company’s most prolific users if they wish to buy. That incentive may not be sufficient.
Reddit May Struggle To Generate Revenue Growth Compared to Meta, Reddit is an advertising also-ran. Reddit’s average revenue per user fell in 2023. In the fourth quarter of 2023, Reddit’s U.S. ARPU fell 7.4% to $5.51. By contrast, in 2023 Meta’s ARPU rose 2.4% to $40.60. Reddit’s content is X-like in that much of its content is toxic for advertisers. Reddit expects to generate revenue — more than $203 million worth — from licensing its content. But this content could enable AI chatbots to “aggregate and synthesize the site’s content and let users view Reddit without visiting the site or seeing advertising,” wrote the New York TimesNYT
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Reddit’s Capital Structure Could Challenge IPO Investors. Finally, Reddit IPO investors will have far less power than some of the company’s largest shareholders. Reddit directors and executive officers and insiders like Advance — which owns 34% voting power — will hold Class B stock, which grants them 10 votes per share to every one vote for each Class A share. Reddit will also offer Class C shares, which have no voting rights, according to the prospectus. If you don’t like how Reddit is running things, owning Class A shares after the IPO will limit your power to do anything about your dissatisfaction.
Seeking Alpha analyst Mountainside Research expects the Reddit IPO to have a rocky start,” he noted. Other analysts think the IPO could become a meme stock given its ties to r/WallStreetBets, SeekingAlpha noted.
I am more bearish. If you must invest in Reddit stock, wait until after the company reports its first quarter results. If Reddit exceeds investor expectations and raises its guidance, perhaps you should consider buying the stock.
If Reddit disappoints, the price will surely drop. Then you can decide whether that makes the company a bargain or a falling knife you should avoid catching.
