It will be the first social media company to go public since 2019's Pinterest.
Last week, Reddit, which is currently ranked as the 16th most popular website worldwide, filed the necessary paperwork for an initial public offering (IPO). The SEC filing opens the door for Reddit to be listed on the New York Stock Exchange with the ticker symbol RDDT. Through the IPO, the company will have the opportunity to raise more money and quicken its growth plans. But it also means more investors' expectations, financial strains, and scrutiny—and most importantly, meeting users' expectations.
What Is Reddit?
Reddit was founded in 2005 by Steve Huffman and Alexis Ohanian, shortly after Condé Nast acquired it. Huffman and Ohanian left the company in 2009, but in 2015, Huffman returned as CEO, a role he still holds today. Reddit is a social media platform organized into subreddits, which are like forums for different topics. Registered users, called Redditors, can interact with content by posting, linking, liking, commenting, asking questions, and answering them. Reddit is different from other social media sites because it uses votes from Redditors, including upvotes and downvotes, to decide how visible, trustworthy, and important content is.
Notably, Reddit declared that it would set aside a certain number of shares for its moderators and users only. This would allow them to own stock in the company and buy Reddit stock at the same price as institutional investors during the IPO. The eligibility criteria include being over 18, residing in the U.S., having created a Reddit account before January 1, and maintaining good standing on the platform. The distribution of shares will take place through a phased six-tier priority system that takes into account moderators' contributions as well as users' karma (a reputation indicator based on upvotes and downvotes).
- Tier 1 for select users and moderators involved in community programs
- Tier 2 encompasses those with a minimum of 200,000 karma or 5,000 moderator actions
- Tier 3 comprises individuals with at least 100,000 karma or 2,500 moderator actions
- Tier 4 for those with 50,000 karma or 1,000 moderator actions
- Tier 5 for users with 25,000 karma or 500 moderator actions
- Tier 6 includes all other eligible users and moderators
This fits with Reddit’s philosophy of community ownership and participation, showing that Reddit wants its most active and involved users to have a say in its financial future.
Redditors' opinions on the company's IPO range widely, from skepticism to enthusiasm. Many people do not want to invest in Reddit because they are worried about how it will do in the future and what changes might be made to the platform. Some see the Reddit IPO as a chance to make money, while others are worried about how this could affect the user experience on Reddit. "Yeah, this site is going to tank once they go public and start trying to maximize investor return," says one user. Others express concern about the potential for increased advertising due to corporate influence. However, amidst the skepticism, there are those who view the IPO optimistically, believing it could lead to improvements. Overall, Reddit users are grappling with the implications of the company going public, weighing the potential benefits against the risks to the platform's culture and community.
Reddit’s Financial Status
Reddit has impressive revenue figures, citing reports from Bloomberg News indicating that Reddit's revenue exceeded $800 million in 2023, with the previous year's revenue standing at $666 million. While these numbers underscore Reddit's substantial revenue generation, they also hint at the platform's potential for further growth and profitability, factors that investors keenly observe when evaluating investment opportunities. Additionally, the revelation that OpenAI CEO Sam Altman holds a significant stake in Reddit adds another layer of intrigue to the IPO. Altman's substantial ownership and voting power underscore the diverse range of stakeholders invested in Reddit's success.
Reddit’s Challenges
Reddit's path to the IPO has not been without challenges. Reddit has had trouble making money off of its platform and turning its large user base into long-term revenue streams. In 2023, the company had a net loss of $90.8 million and a cumulative deficit of $716.6 million. In spite of this, there are signs of progress. From 2022 to 2023, sales went up by 21%. Reddit's revenue-generating strategies, including advertising, monetizing commerce, and licensing data, are positioned as key drivers of future growth. It is clear that these efforts have not been without controversy, though, since users and moderators have been critical of choices like content licensing agreements and changes to how ads are personalized.
Additionally, the company's S-1 filing highlights potential risks associated with the infamous "meme stock" phenomenon originating from the subreddit r/WallStreetBets. This online community, boasting 15 million members and often likened to "4chan Found a Bloomberg Terminal," gained notoriety for orchestrating a short squeeze on GameStop stock in 2021, resulting in substantial losses for hedge funds. The extreme volatility witnessed during this episode, with GameStop's stock surging over 600% in a matter of days and multiple trading halts, exemplified the power of retail traders banding together.
Despite attempts to replicate this success with other heavily shorted stocks like AMC and Bed, Bath & Beyond, outcomes varied, solidifying the trend of trading "meme stocks." Reddit acknowledges in its S-1 filing the potential impact of this phenomenon on its IPO, stating that the broad awareness and brand recognition of Reddit, particularly through the popularity of r/WallStreetBets among retail investors, could lead to extreme volatility in the market price and trading volume of its Class A common stock. This volatility, unrelated to Reddit's underlying business or macroeconomic fundamentals, poses a risk for investors, potentially resulting in losses if shares cannot be sold at or above the initial offering price. Despite Reddit's association with meme stocks and retail trading frenzies, Redditors themselves seem less than enthusiastic about the company's IPO. Comments such as "short the sh*t out of it" and skepticism about Reddit's ability to monetize its user base highlight a prevailing sentiment of distrust and pessimism among the community.
However, the broader sentiment among Redditors reflects deep-seated apprehension and dissatisfaction with Reddit's leadership and direction. CEO Steve Huffman's controversial decisions, coupled with concerns about the company's financial performance and governance, have eroded trust and confidence among users. Many people consider the IPO to be a potential catalyst for the platform's further decline rather than a positive development.
When Will Reddit Go Public?
No firm date has been set for the Reddit IPO yet, but the process is expected to start with the public filing near the end of February, and shares will then be made available to the public, possibly in March. This filing typically includes comprehensive details about the company's financial performance, operations, risks, and governance structure, providing potential investors with essential information for their investment decisions.
Reddit's IPO marks a significant moment in its evolution from a niche online forum to a publicly traded company. Ultimately, the success of Reddit's IPO will hinge on its ability to strike the right balance between profitability and community engagement in the eyes of its stakeholders.
