In 2012, Meta Platforms (then known as Facebook) made a big splash with its initial public offering. Twitter followed in 2013 but was later taken private by Elon Musk and rebranded as X. Snapchat and Pinterest went public in 2017 and 2019, respectively. And now there's another social media platform you can invest in.
Reddit's (RDDT 7.02%) shares began trading on the New York Stock Exchange (NYSE) on Wednesday, March 20, 2024. On its first day on the market, the stock skyrocketed 48%.
A long time coming
Although Reddit is new to the stock market, the company has been around for nearly two decades. University of Virginia roommates Steve Huffman and Alexis Ohanian founded Reddit in 2005 intending to make a website that would be "the front page of the Internet."
Huffman, who serves as Reddit's CEO, wrote in the company's regulatory filing to list its shares on the NYSE that the site operated for two months before it had enough user posts to fill its front page. Then came an explosion of traffic.
Today, Reddit boasts 73 million average daily unique users. It has 267 million average weekly users. The social media platform hosts more than 100,000 active communities spanning a wide range of interests.
Why go public after operating as a private company for so long? Huffman said users have a "deep sense of ownership over the communities they create on Reddit." Management wanted "this sense of ownership to be reflected in real ownership -- for our uses to be our owners." Reddit also wanted to reward its employees who have worked hard to build the platform.
Why so much investor excitement over Reddit's IPO?
It's likely that many of the investors who bought Reddit shares when it first started trading actively use the company's platform. They recognize the value that Reddit provides. Other investors, though, could simply be looking at the company's growth prospects.
Reddit generated revenue of $804 million last year, jumping 21% from 2022. The company's gross margin was an impressive 86%, up from 84% in the previous year.
Advertising is Reddit's primary revenue source. The company believes that its platform offers a unique value proposition for advertisers with its highly engaged users participating in "trusted, passionate communities." In a survey commissioned by Reddit last year, 75% of users stated that they viewed the website as "a trustworthy place" to help make buying decisions for products.
Reddit expects that e-commerce will be another key growth driver. Some marketplaces have already been launched in its online communities, including Photoshop services. The company is moving forward with initiatives to promote more e-commerce services and believes it can monetize these efforts.
Perhaps the most intriguing attraction for Reddit is its connection with artificial intelligence (AI). The company's platform contains over 1 billion posts and over 16 billion comments. It ranks in the top 10 most-visited websites in the United States. This extensive content makes Reddit a leading training source for large language models.
In February, Alphabet's Google unit inked a $60 million deal with Reddit to use its site to train AI models and improve Google Search. Reddit also gained access to Google AI models to improve its platform.
Reddit and weep?
Should you buy Reddit after its sizzling IPO? I'm on the fence with this stock for a few reasons.
First, Reddit has never made a profit after nearly 20 years of business. The company posted a net loss of $90.8 million last year. I'm not convinced that Reddit is on a solid path to profitability.
Second, thanks to the spectacular IPO, Reddit's market cap now stands at around $8 billion. That translates to a price-to-sales ratio of nearly 10 times. The company's growth, while solid, doesn't seem to justify such a premium valuation.
Third, it's possible that AI-powered virtual assistants could reduce Reddit's traffic and user engagement in the future. If this happens, the company's advertising revenue will fall. Also, if AI-generated content floods Reddit's communities, it could cause some users to abandon the platform.
Granted, these concerns could be overblown. Reddit could achieve profitability in a few years. Its growth could accelerate. AI could provide more of a tailwind than a headwind.
I won't argue that investors who buy Reddit now will regret it later -- a "Reddit and weep" scenario. However, there's too much uncertainty for now to get me off the fence with this new stock.
