As Reddit gears up for its initial public offering (IPO), it marks a significant milestone for the social media platform, especially considering its iconic role in the WallStreetBets-fueled short squeeze phenomenon of the past. However, with the impending IPO, questions arise about the potential trajectory of Reddit’s stock, particularly amidst prevailing skepticism from WallStreetBets members.
Reddit IPO Details
The IPO is slated for this Thursday, with Reddit set to be listed under the ticker symbol “RDDT.” The price range has been established at $31 to $34 per share, although final pricing will be determined based on investor demand. Reports indicate substantial interest, with the IPO being oversubscribed by approximately five times. Consequently, Reddit may opt for a pricing at the higher end of the range, or possibly even exceed it.
In terms of valuation, Reddit is eyeing up to $6.4 billion, a notable markdown from its valuation of $10 billion during its last funding round in 2021. This decline aligns with broader trends of valuation compression observed across both public and private growth companies over recent years.
Reddit’s Financial Performance
Examining Reddit’s financials, the picture reveals a mixed bag. While revenues reached $804 million in 2023, reflecting a 20.6% increase year-over-year, the company continues to grapple with losses. In the same period, Reddit incurred a net loss of $90 million, an improvement from the $158 million loss in 2022. Notably, Reddit has yet to achieve profitability since its inception, consistently burning cash. The negative free cash flows of nearly $85 million in 2023, though an improvement from previous years underscore the ongoing challenges.
Assessment of Valuation and Risks
At a 2023 price-to-sales multiple of almost 8x, Reddit’s valuation doesn’t appear particularly enticing, especially given its modest revenue growth and persistent losses. Moreover, the company faces significant risks, particularly its heavy reliance on advertising revenue and user-generated content, moderated largely by volunteers. Any decline in content contributions or engagement could adversely impact Reddit’s business and financial performance, as highlighted in its regulatory filings. Additionally, concerns about stock price volatility, exacerbated by retail investor interest on platforms like WallStreetBets, further underscore the risk factors associated with investing in Reddit.
Conclusion
In light of the aforementioned factors, the Reddit IPO may not present an attractive investment opportunity at its proposed valuation. Despite potential opportunities in areas such as artificial intelligence (AI) and partnerships with companies like Google for AI training, regulatory scrutiny and ongoing operational challenges temper the optimism surrounding Reddit’s prospects. While WallStreetBets may not wield the same influence as in previous instances, market dynamics are likely to dictate Reddit’s stock performance, potentially settling closer to a fair value assessment, which may be lower than the sought-after $6.4 billion valuation.
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