Can the company that launched the meme stock rally be a good investment itself? Reddit is credited with being the breeding ground for investors who rallied together behind highly shorted stocks such as AMC Entertainment, GameStop, and Bed Bath & Beyond and sent their shares soaring to astronomical heights.
Although some of these companies maintain a core following of traders, the enthusiasm held for many meme stocks has long since cooled and many have revisited their previous low valuations.
Image source: Getty Images.
Now Reddit is thinking about going public. It originally filed for a confidential initial public offering at the end of 2021 when the meme stock trading frenzy was still going strong. But as the market made a turn for the worse in 2022, it -- and most other companies considering IPOs -- shelved the idea until conditions improved. That time has apparently come.
According to The Information, the social media site resuscitated its plans and is aiming for the back half of 2023. Because it filed for a confidential offering, Reddit is shielded from having to publicly share information until just before the offering, giving it time to work out of the spotlight. Yet that also means investors won't have a lot of time to decide whether to invest in its IPO, so let's consider whether the social media platform would be a good place for your money.
A fertile breeding ground
Although many people might have become familiar with Reddit during the stock trading boom two years ago, it was founded in 2005 and has over 100,000 active message boards on virtually any topic. Politics, gaming, sports, celebrities, and yes, stocks, can be discussed in niche forums on the message boards called subreddits, which are run by users.
Reddit says it has over 57 million unique daily users with over 450 million monthly users. The subreddit r/WallStreetBets is where the meme stock rally was incubated, with stocks like GameStop going parabolic and rising over 1,600% in the span of two weeks. Other stocks also saw fabulously large gains.
The interest in the r/WallStreetBets subreddit, and Reddit in general, helped push the social media platform to consider going public -- which sounds like another company that tried to capitalize on the meme stock trading frenzy by going public, Robinhood.
The online stock trading platform that helped facilitate meme stock trades debuted at $38 and briefly went as high as $70 a share. But today it trades for $10 as trading volumes sharply declined, proving it's difficult to maintain enthusiasm for extended periods of time. Reddit likely faces similar constraints.
Growth in the slow lane
Like almost all social media platforms, Reddit generates revenue from the sale of advertising space. In August 2021, when it was going through its latest round of venture capital funding, it noted ad-based revenue hit $100 million in the second quarter, which was a 192% increase from the prior year. Reddit said it expected to generate $350 million for the full year, or double what it made in 2020, and it was on track to hit $1 billion within two or three years.
Although that sounds impressive, analysts were underwhelmed. Twitter had 187 million daily users at that time and generated $3.5 billion in revenue; Snap had 319 million users at the end of 2021 and $4.1 billion in revenue.
Reddit also sells premium memberships for $5.99 a month (or $49.99 for the year) that offer ad-free browsing among other perks. There are an estimated 350,000 premium members.
Image source: Getty Images.
Deflated valuations
While Reddit went on to raise $700 million in financing in 2021, giving it a valuation of more than $10 billion, the company was looking for a $15 billion valuation when it filed its confidential IPO paperwork, according to Reuters.
That is going to be hard to achieve today. Fidelity Investments, which led the fundraising round, recently valued Reddit at $6.6 billion as the persistent inability to become profitable weighs on the company. Tech stocks like Reddit have also fallen out of favor, and though they're staging a comeback this year, it may not be enough to draft interest in Reddit to boost its valuation.
And it's a difficult environment for ad-based businesses. Not only is Reddit competing against other ad-based sites like Twitter, Snap, and Pinterest for dwindling ad dollars, but it's also going up against the titans of digital advertising, Alphabet, Meta Platforms, and Amazon.
That's why Reddit may be a fun place to hang out and discuss stocks, but does not appear to be a very good stock to bet your money on.
