After years of anticipation, Reddit finally conducted its initial public offering (IPO). Nicknamed the “Front Page of the Internet,” Reddit offers message boards that allow users to ask questions on virtually limitless topics and get answers from fellow “Redditors.” The company debuted publicly on March 21 and soared higher out of the gate. Reddit trades on the New York Stock Exchange under the ticker symbol RDDT.
Reddit had an atypical offering, allowing users to participate in the IPO, while IPOs are almost always limited to connected insiders. Here’s what you need to know about Reddit’s unusual IPO, including some key risks.
What are the details of Reddit’s IPO?
There have been rumors for years that Reddit is going public, but now it has finally happened. The stock market has been in a slump over the past 15 months, and after some of the worst years for IPOs in decades, companies looking to go public are finding it a more attractive time to do so.
“We have strong job growth and other indicators suggest this is a good time for IPOs,” said Phil Haslett, co-founder and chief revenue officer at EquityZen, a pre-IPO equity platform. “And so I think more companies will start to dip their toes, but most will wait until, hopefully, a successful company comes to market first.”
While the timing for an IPO may be relatively strong, Reddit’s timing may not be the best either. It was valued at $10 billion in August 2023 as near-zero interest rates sparked a wave of animal spirits before the Federal Reserve began raising rates in early 2023. Now the company initially had a valuation of just two-thirds of that (nearly $6.5 billion) with shares at $34 on Wednesday. But investors quickly closed that gap on the stock’s first day, sending the stock 48 percent higher.
Despite the initially lower valuation, the IPO was reportedly up to five times oversubscribed. according to several reports. The surge of investor interest isn’t exactly unusual for an IPO, but it is significant given Reddit’s endless history of losses. The company has never made a profit in its 20 years of existence, although it cut losses in 2023 from the previous year.
Unusually, Reddit offered shares to its Redditors and other insiders, with up to 8 percent of the shares reserved for them. In addition, the company also offered shares to individual investors through well-known online brokers such as SoFi and E-Trade – a potential red flag for investors (more below).
According to the company’s prospectus, Reddit has 73 million daily active unique users and about 267 million weekly active unique users across more than 100,000 boards or subreddits. In 2023, it entered broader consciousness, especially among investors. The subreddit r/wallstreetbets helped popularize shares of retailer GameStop, and the shares rose dozens of times in value in a few months.
Reddit’s top financials
Post-IPO, Reddit has a strong balance sheet, an important feature given its inability to turn a profit to date. The company has nearly $1.5 billion in cash and equivalents, with no debt and relatively minimal other liabilities.
Where things look risky, however, is in the company’s historically lack of profitability. Although the trend moved in the right direction in 2023, the company still posted a significant loss. After losing nearly $159 million in 2023, Reddit only lost $91 million in 2023.
That loss comes on top of strong revenue growth of more than 20 percent year-over-year in 2023. In other words, Reddit lost more than 11 cents on every dollar of revenue in 2023. Again, that’s better than its 2023 performance, when it lost nearly 24 cents on every dollar sold. So investors will want the company to continue to grow revenue while keeping costs in check.
Investment Risks of Reddit’s IPO
Reddit’s IPO also comes with some significant risks, including at least one typical of recent technology IPOs. Taken together, these risks paint an unflattering picture of the IPO opportunity.
Track record of losses
Reddit has lost money every year since its founding in 2005, so there’s a big question mark over whether the company can ever make money after two decades of seemingly failing to do so.
Multi-share class structure
Reddit has multiple share classes, with millions of Class A and Class B shares and the potential to issue Class C shares as well, although the company says it currently has no plans to offer Class C shares. Voting rights vary significantly from case to case:
- Class A shares have one vote per share.
- Class B shares have ten votes per share.
- Class C shares have no votes per share.
By giving insiders the more powerful Class B shares, this structure puts them in a privileged position compared to outside shareholders. With a relatively small holding company, insiders can effectively control matters that require a shareholder vote. And that’s what’s going on on Reddit.
In total, class B share holders have 97.1 percent of the voting power, considering their ownership interests in both A and B shares. Because only Class A shares will be sold in the IPO, new shareholders will be dependent on deep-rooted insiders. Unsurprisingly, this scheme is unpopular with investors because they ask for money but they get virtually no say in major decisions. That said, a number of tech IPOs like Slack and Coinbase have used multi-class share structures.
Sales to private investors
Reddit reserved 8 percent of its shares in this offering for Redditors, some members of the board of directors, as well as friends and family of employees and directors. Reddit also offered shares to individual investors through E-Trade, Fidelity Investments, SoFi and Robinhood.
IPOs are difficult (read: impossible) for individual investors to access. Shares are normally reserved for the privileged partners of the IPO underwriters, and they offer the potential for profits that are almost locked in from day 1 with the legendary IPO pop. So retail investors aren’t too cynical in wondering why they’re getting a piece of the action now and why insiders and underwriters seemed willing to give them a seat at the table this time.
In short
As with all investment decisions, the decision to participate in the Reddit IPO, either before the IPO or shortly after the debut, should be based on your own financial situation. But given the risks in the business, especially a record of losses, and the historically poor first-year IPO performance (excluding the first day IPO pop), investors may want to wait for more clarity before deciding whether or not the stock has a place in their portfolio.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
